Twitter Inc (NYSE:TWTR) disappointed on earnings yet again. I’ve traded TWTR stock before with mixed results, but one consistent factor has been the constant stream of flubs from Twitter management. Needless to say, Wall Street hated the earnings report, and here we are faced with another double-digit decline in Twitter shares.
Why let an opportunity go to waste?
Even though fundamentally Twitter stock is mired thanks to less-than-optimal management decisions, I can see a price floor for TWTR stock. I have long been a believer that the Twitter platform is an incredible asset and that someone will eventually figure it out. But no one has stepped up to the plate with a buyout.
Click to Enlarge Price action of late had been bullish, but today’s red ink will put a black mark in the trend. That said, the lower TWTR stock goes, the easier it’ll be for someone to buy Twitter out, and that will offer a floor of sorts. Traders will be more likely to step in on prior lows.
Previous strategies have involved buying calls for hopes of a buyout. I usually set up the trade in pairs: one trade to sell puts and generate income, and a second to buy calls in hopes to catch a spike on rumors or buyout. Most times these work, but for TWTR stock, I am not hopeful that management can do much anytime soon.
Today will be different. I simply want to generate potential income from the buyout expectations without the upside “hopium.” I want to capitalize on the fact that everyone agrees that Twitter is an incredible powerful tool for its users. Any user, big or small, can reach the world with a simple tweet from their phone. This is a unique outlet method that has had its moments, none smaller than geopolitical flare-ups like in Egypt for example.
How to Trade TWTR Stock
Trade: Sell the TWTR Dec $12 put for 43 cents per contract. To be successful, we need Twitter stock to stay above $12 per share through December expiration. This is a buffer of an additional 25% downside from today’s $16.4 per share price. If successful, this trade could yield 2.4% relative to today’s price.
I know I could have stepped up higher to collect more premium. The Dec $13 put could sell for an extra 20 cents, but in this case, I favor the trade with a bigger buffer and that has a higher chance of success. It’s just a personal preference. Some are willing to tolerate more risk than others. I would personally step up on a surer stock like Apple Inc. (NASDAQ:AAPL), but not one as iffy as Twitter.
Only sell puts if you’re willing and able to buy TWTR stock at my sold strike. If Twitter continues to fall, we’ll accrue additional losses. But that’s still better than risking $16.40 with a pure long Twitter buy right now.
We’re not obliged to hold this position into expiration, and we can close at any time for partial gain or loss.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @racernic and stocktwits at @racernic.
