Twitter Inc (NYSE:TWTR) stock trades in violent spurts. In April, it spiked 30% then quickly gave back half, only to rally back up 10% in mere weeks. Just yesterday TWTR stock spiked 3.5% but then gave up most it to close +0.6%. Today I will share a trade to benefit from the see-saw without chasing price targets.
Traders have a love-hate relationship with TWTR stock. Most of us love the platform. I use it every day, as it is my only source of news.
But on the other hand, I can’t stand how incompetent management has been in leveraging their asset to create profits.
I won’t argue for TWTR stock’s fundamentals here, and I don’t need to. I am strictly focused on the potential that is in the stock but only from a buyout headline. Twitter is too valuable of a global platform that someone is likely to buy it eventually… Maybe. But maybe is all I need. This creates a put below just from the notion of an impending headline.
I have successfully traded TWTR from both sides, long and short. But in all cases it was never to chase hope. On the long side I usually sell risk below support when Wall Street sells the stock as evidenced by this trade that delivered quick profits out of thin air.
Today I want to repeat performance but for a specific purpose. I want to generate income by selling downside risk in TWTR because I see a potential opportunity that I may want to capture. Typically traders see a potential spike and they buy long and hope it happens. I am not that guy. I have faith that management will continue to disappoint us.
Click to Enlarge In the absence of value, the only reason I dare selling puts in TWTR stock is that the hope that Wall Street has for a buyout keeps a floor under the stock.
Technically, there is upside potential around $18.70. Yesterday’s candle touched that neckline but failed. If by chance they can take that out, TWTR has the chance at $20. But the bad news is that the neckline has been a failure level of late. That’s another reason why I am not a buy-and-hope investor.
TWTR Stock Trade Idea
The Trade: Sell TWTR Jan 2018 $14 put and collect 75 cents to open. Here I have an 80% theoretical chance of retaining maximum profits, but if the price falls below my strike I will own the shares and would accrue losses below $13.25.
Selling naked puts is not for all investors. Those who don’t want to risk owning the shares can sell a spread instead. There, the risk is limited.
The Alternate Trade: Sell the TWTR $14/$12 bull put spread where I have the same theoretical chance of success but with limited risk. If successful, the spread would yield 25%. In either of these setups, I can profit from TWTR even if it falls another 20% from here. With earnings drawing near, I may need the buffer.
The Juice (Optional): If I see TWTR’s price challenge the aforementioned neckline, then I could chase the potential by buying debit call spreads. But I am not one to start here. I need to see confirmation of the breakout.
Selling options is risky, so I never expose my portfolio to risks that would break me.
Learn how to generate income from options here. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @racernic and stocktwits at @racernic.
