by Tyler Craig | December 19, 2013 8:00 am
The recent explosion in Twitter (TWTR) has cooled in recent days, providing what could be a low-risk entry. After spending its first month as a public company mired in a trading range, the blue bird finally took flight. Since finding support in late-November near $40, TWTR stock rallied an impressive 50% before finally taking a breather.
The higher volume accompanying the surge adds validity to Twitter’s breakout and makes it all the more likely that any dips toward the $50 level are bought with aggression. If institutions are indeed in accumulation mode, they ought to continue to add TWTR stock, particularly during pullbacks.
Adding further allure to a bullish bias on TWTR stock is the principle of polarity — the idea that old resistance becomes new support. Even if the current bout of profit taking drives Twitter shares back toward past resistance levels, there’s a good chance they will turn into support as buyers use it as an opportunity to snatch up shares near a prior breakout level.
The price of TWTR stock isn’t the only thing that’s been rising — activity in Twitter options has also received a boost. Last week, the daily volume for TWTR option contracts rose to a new high of 315,000. The groundswell in demand also lifted implied volatility (IV) as high as 67%. Although IV has seen a slight dip this week, it remains near the upper end of its range. With IV arguably high, it appears selling options on TWTR might be more favorable than buying them.
One of the more intriguing option plays on my radar for exploiting the current TWTR stock pullback is selling the Jan 46 put for 75 cents or better. Consider it a bet that Twitter remains above $46 over the next month. The reward is limited to the initial 75-cent credit received. By selling the put, you obligate yourself to buy 100 shares of TWTR stock at $46 if the put sits in-the-money at expiration — which might not be a bad idea if you’re bullish on the stock longer-term.
As of this writing, Tyler Craig had no positions on any of the aforementioned securities.
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