Many on Wall Street are expecting Twitter Inc (TWTR) to fade into the background and/or get bought out — especially after many talking heads proclaimed that the company was next on the block following the acquisition of LinkedIn (LNKD) by Microsoft Corporation (MSFT).
But the company’s actions since Microsoft’s move — investing $70 million in SoundCloud and buying AI firm Magic Pony — show it is fighting tooth-and-nail to remain competitive, if not completely independent.
Click to Enlarge Still, Twitter’s attempts to recover have done little to make a dent in the stock’s 75% downward spiral since January 2014.
Sure, TWTR is up 14% since its June 10 low, but resistance looms overhead in the $17-$18 region.
Furthermore, with Twitter stock trading near overbought levels, it has little left in the way of upside potential on the technical front. It needs something big on the horizon to overcome these technical hurdles.
Should some outside driver arrive, there is plenty of buying potential left on the sidelines. For instance, data from Thomson/First Call indicates that 31 of the 43 analysts following TWTR stock rate it a “hold” or worse. Additionally, the 12-month price target of $18.38 represents a modest premium of about 12% to Tuesday’s close. Any news that could shake these bears loose or inspire a price target hike could go a long way to power TWTR higher.
There is also the potential for a short squeeze in TWTR stock. As of the most recent reporting period, 71.3 million shares of TWTR were sold short, representing more than 12% of the stock’s total float.
There are signs that short sellers are preparing for a Twitter stock rally, as call open interest is on the rise. Currently, the July put/call open interest ratio arrives at an extremely bullish 0.43, with calls more than doubling puts among options set to expire within the next month. Short sellers typically buy calls as a means of protection against sharp rallies.
Overall, July implieds are pricing in a move of nearly 7.7% for TWTR stock, placing the upper bound near $17.50, while the lower bound lies near $15.
2 Trades for TWTR Stock
Call Spread: The potential for a suitor to emerge and offer to buyout Twitter remains considerable, and the company itself is still alive and kicking, as evidenced by the recent succession of dealmaking. Those traders looking for a TWTR rally might want to consider a July $16.50/$17.50 bull call spread.
At last check, this spread was offered at 32 cents, or $32 per pair of contracts. Breakeven lies at $16.82, while a maximum profit of 68 cents, or $68 per pair of contracts, is possible if TWTR stock closes at or above $17.50 when July options expire.
Straddle: On the other hand, there is plenty of volatility in the overall market — especially with the Brexit vote on Thursday. Furthermore, a call spread limits your upside potential in the event of a buyout offer and leaves you vulnerable to any bearish news that could sent TWTR stock sharply lower.
As such, traders might want to consider a TWTR straddle. A straddle involves the simultaneous purchase of an at-the-money call and an at-the-money put, and allows the trader to take advantage of a large move in the underlying stock regardless of the direction.
At last check, the TWTR July $16 straddle was offered at $1.48, or $148 per pair of contracts. Breakeven for this trade lies at $17.48 on the upside and at $14.52 on the downside.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
