Trade of the Day: Twitter: (TWTR)

The start of August is historically weak, and bears took the time to do some serious technical damage

Apple (AAPL) shares closed below their 200-day moving average for the first time since September 2013 last week. The move below $120 officially put shares in “correction” territory, and the bulls will need to recover that level this week. But Apple wasn’t the only high-profile name to see its shares take on additional turbulence. Twitter (TWTR) touched fresh 52-week lows following Friday’s drop to $26.87.

TWTR shares look “cheap” at current levels, but Twitter has far more issues then a sagging stock price.

TWTR is trading within $1 of Wall Street’s initial public offering (IPO) price of $26 a share from November 2013. While I mentioned that TWTR shares look cheap, it wouldn’t surprise me to see them get even cheaper. There is no technical support at current levels, and the recent slide to fresh all-time lows is not an encouraging sign.

Twitter’s market cap is a little over $18 billion. Takeover rumors for the company have picked up in recent weeks, but, without a CEO, a deal is hard to do. Shares of TWTR still look risky until they recover the $29-$30 level. The announcement of a new CEO might be viewed as a positive catalyst, depending on who the company chooses, which would be the first step in stabilizing the stock.

Twitter has topped Wall Street estimates in five of the past six quarters, and its revenue numbers are impressive. However, the company has a broken platform and no structure. There is talk of a boardroom shakeup, so the outlook for TWTR seems murky for at least another month.

I’m still watching TWTR for a bullish or bearish entry point.  Here are the key levels that will tell me when to take action:

If TWTR shares fall below $26.75 in the near term, I’ll be targeting the TWTR September 25 puts (TWTR150918P00025000), which are around 80 cents, for the stock to test the low $20s.

However, if TWTR shares can clear $30 this month, I’d look to play the TWTR January 2016 35 calls (TWTR160115C00035000) currently trading around $1.25. These call options do not expire until mid-January of 2016. At current levels, they are nearly worth the risk of a lottery ticket, but with better odds. If TWTR can clear $37.50 by mid-January 2016, these options would be worth at least $2.50, for a 100% return from current levels.



While there could be a short-term bounce over the next couple of weeks, the bulls have a lot of work to do, which is why looking at a short-term put and a longer-term call in TWTR makes sense.

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