Buy the TWTR Stock Dip With Options

by Tyler Craig | December 19, 2013 8:00 am

The recent explosion in Twitter (TWTR[1]) 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.

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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.

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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.

  1. TWTR:

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