Trade of the Day: Twitter (TWTR)

The historical January Effect has been busted, and the odds of a bearish year have greatly increased

Shares of Twitter (TWTR) fell to a fresh all-time low of $19.60 on Friday. Of course, shares have only been publicly traded for a little more than two years, but Friday’s drop into the high-teens was a significant development.


I have always said that Twitter shares deserve a “premium” based on the company’s ability to reach tens of millions of people in seconds. Although not all late breaking news on Twitter can be trusted, many of the stories are newsworthy, which is why shares look “cheap” at current levels.

Look, nobody likes trying to catch a falling knife, but knowing when there is blood on the street is a different story. However, just because Twitter shares are at fresh all-time lows doesn’t mean they can’t go lower. With a market cap now under $14 billion, a major tech company will likely step up to the plate, especially if shares fall to the mid-teens.

Toss away fundamentals, and let’s look at a pure cash play for Twitter. At a 50% takeout premium, a buyout offer at $30 a share would cost Apple (APPL) just over $27 billion at current levels. Apple currently has more than $200 billion in its cash coffers.


Apple CEO Tim Cook could sneeze at paying 10% of the company’s cash coffers to own Twitter. In the “old days,” or pre-internet bubble, takeout premiums were usually 100% of a stock’s price, so a 50% premium is a steal nowadays.

Twitter is expected to earn $710 million in its recently ended quarter. A $27 billion tab would be paid off in less than 10 years at current levels. Any increases or decreases in Twitter’s $2.5 to $3 billion a year in revenue would make the payoff either come quicker or take longer.

The risk/reward for an Apple/Twitter marriage is a no-brainer, but this takeover may or may not ever happen. Apple could probably easily fix Twitter’s platform problems within a month and could turn Twitter into its own newsfeed.

In the meantime, the TWTR February 18 puts (TWTR160219P00018000) look “tempting” at current levels to play continued short-term weakness in the stock.

Bearish traders could buy these puts at current levels if they expect a drop in TWTR shares to the mid-teens. If shares are below $16 by mid-February, technically, these options will easily return triple-digits from current levels.

The TWTR February 16 puts (TWTR160219P00016000) also look like a tease, but these put options are nearly $4 “out of the money.” If shares of Twitter are below $15 come mid-February, this trade would also represent a return of 100% or more from current levels. However, this would require another 25% drop in TWTR shares from current levels in just over five weeks.

On the other hand, bullish traders could “sell to open” the TWTR February 16 puts and collect the $0.50 in premium, or $50 for every contract sold. If these puts expire worthless, then you could keep 100% of the premium and the trade is complete.

However, the “risk” is that writing a naked put like is that it would require the seller of the option to buy 100 shares of Twitter common stock at $16, if shares are below this level by mid-February. To sell to open 1 contract of this trade would require you to have $1,600 in your brokerage account, and you have to be approved to sell, or short, naked puts. If assigned, the cost of the position would be lowered to $1,550. You could then continue to write covered calls or sell additional TWTR puts at lower levels to build a larger position.

I also wanted to update the bearish index put option trades from last Monday’s Trade of the Day.

I profiled the S&P 500 ETF (SPY) as a way to “short” the S&P 500 if the index fell below 2,025-2,020 or SPY dropped below $202. SPY came into the week at $203.87 and tested a low of $191.58 on Friday. The SPY February 190 puts (SPY160219P00190000) came into last week at $1.60 and reached a peak of $5.20 on Friday. If you decided to enter the trade and got in under $2, lock in profits on half of the position this morning and set a stop at $4 to protect profits in case the index rebounds. Let the other half ride while setting higher Stop Limits to protect profits.

I also profiled the PowerShares QQQ Trust ETF (QQQ) and the QQQ February 105 puts (QQQ160219P00105000) at $1.12 last Monday. I said to get “short” or buy the puts if the QQQs failed at $110 or if the Nasdaq fell below 4,925. These puts tapped a high of $4.04. If you decided to take this trade, close half today and set a stop at $3.25 to ensure a 200% profit.

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