Twitter Inc: Strap in Tight for Mercurial Earnings (TWTR)

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The flight path of shares in Twitter Inc (TWTR) have finally leveled out. And while it’s nice to see the blue bird stop diving for a spell, I suspect its respite is due for an abrupt end.

The always spicy earnings announcement is fast approaching for TWTR stock holders. Whether Twitter delivers or disappoints, one thing is assured: it’s going to move.

Gauging just how much Twitter is expected to pop (or drop) is a simple matter of seeing how much the grizzled vets playing the options market are willing to pay for calls and puts heading into next Tuesday’s announcement. Holding a call and a put at the same strike and expiration is called a “straddle.”

The value of the April weekly options straddle that expires next Friday reflects the expected move for the next week. And since earnings are the main event in the days ahead, the straddle value is heavily impacted by how much the seers expect TWTR to gap on its report.

TWTR earnings
Click to Enlarge
Source: OptionsAnalytix

With Twitter at $17.51, the weekly $17.50 straddle is trading for $2.30. That means the expected range for the stock between now and next Friday is $15.21 to $19.81. Said another way, the options market is pricing in about a 13% move up or down in TWTR.

The million dollar question is whether you think that sounds too high or too low. Either way, there’s a trade to be had.

Twin Volatility Trades for TWTR

Rather than braving the earnings drama with a directional trade in hand, many option addicts prefer to play the volatility. The game is simple: If you think Twitter is going to move more than expected, go long volatility; if you think it’s going to move less than expected, go short volatility.

If you think shares of Twitter are due for some earnings drama, buy the May $17.50 straddle for $2.78. The trade consists of buying to open both the May $17.50 call and put. Going out to May is more conservative than simply snatching up the aforementioned April weekly straddle. If you’re wrong, it will lose less.

Your max risk is limited to the $2.78 debit and will be forfeited if TWTR stock is sitting at $17.50 at expiration. The max reward is unlimited so pray for a massive move!

On the flip side, let’s say you think all the anticipation building into Twitter earnings is much ado about nothing, and that the stock will move much less than expected. Well, then, sell the May straddle for $2.78 credit. That is, sell to open the May 17.50 call and put.

The max reward is limited to the initial $2.78 credit and will be pocketed if the stock is pinned right at $17.50 at expiration. But, really, you’ll capture some type of profit provided TWTR remains between $14.73 and $20.29, so the stock can trade in a fairly wide range and still deliver the goodies.

At the time of this writing Tyler Craig had no positions in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/04/twtr-twitter-stock-earnings-options/.

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