Twitter Inc (NYSE:TWTR) is a great example of how even a disappointing company can bounce around. TWTR stock is up nearly 40% in the past three months — this despite dropping one disappointment after another.
Twitter management is disliked by most traders. In spite of having an outstanding platform, they haven’t yet been able to monetize it. Fundamentally, I’ve been consistent in my opinion: Twitter’s platform is an extremely valuable asset, and someone will eventually figure it out. I have faith that TWTR eventually will be bought out.
Click to Enlarge Until recently, buying Twitter stock or calls had been challenging at best. So my most successful TWTR trades were those selling risk around price ranges to to generate income. This divested my interest in Twitter stock from being tied tightly to what management delivers in performance.
I’m looking for repeat performance from these trades.
2 Trades on Twitter Stock
Trade No. 1: Sell the TWTR Jan $15 put for 80 cents per share. I need Twitter stock to stay above $15 per share through mid-January.
I only sell naked puts if I am willing and able to own TWTR shares at my sold strike price. My breakeven is $14.2 per share.
I may be assigned the stock if Twitter falls below my strike price while I am in the trade. I would then accrue losses for as low as TWTR falls. The good thing here is that I would have almost a 25% buffer from current price, and this trade has a 75% theoretical chance of success.
Selling naked puts requires margin, so it’s not suited for every trader. That said, I can modify the trade into a credit put spread to lower the profile. That would give it a finite maximum loss amount. And I can keep the same theoretical chance of success, so I don’t have to step closer to the current price.
Trade No. 2 (More Conservative): Sell the Jan TWTR $15/$14 credit put spread for 25 cents per contract. This trade would result in a 33% yield on money at risk. To be successful, we just need Twitter stock to stay above $15 through mid-January.
Choosing a Trade
The real difference between both trades is the size of the risk.
When I sell naked puts, my max loss is theoretically the difference between zero and the strike price sold, less what I collect to open the trade. In Trade No. 1’s case, I would be risking $15 per share if TWTR falls to zero. In a credit put spread, my maximum risk is the width of the spread less what I collect to open the trade. So in Trade No. 2, I would be risking just 75 cents per contract.
I chose $15 per share because it seems to be a good bounce level should Twitter stock fall out of favor again — something that might actually be in the making today. If I were assigned TWTR at $15 per share, though, I feel confident that I would be close to a bottom. The cheaper Twitter stock becomes, the more likely it will be bought out.
I am not obliged to hold either of these trades through their expiration dates, and I can close either for partial gains or losses at any time.
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.
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