Shares of Twitter Inc (NYSE:TWTR) closed right at the critical support area of $18 on Wednesday. This followed a sharp selloff following yet another potential buyout rumor that initially drove Twitter stock to over $20 on September 7. With TWTR now back to a more reasonable price, closing at $18.08, I think a speculative bullish position could prove profitable.
From a technical perspective, TWTR stock is at inflection point at the $18 level. It has held that level since breaking above it in early August.
Twitter stock also has rare double gap support now at the $18 level, twice falling sharply following the last two earnings reports.
The ability to hold this level after regaining the ground lost bodes well for TWTR stock over the coming weeks.
TWTR stock has certainly disappointed investors recently with slowing revenue and user growth. But the fact remains that Twitter has over 300 million monthly users, a valuable commodity. The recent streaming contract with the NFL is a step in the right direction to more fully engage and monetize current Twitter users.
While previous buyout rumors have proven to be unfounded, I think eventually a deal for TWTR will get done. Potential candidate speculation includes former Microsoft Corporation (NASDAQ:MSFT) CEO Steve Ballmer, who already has a 4% stake in the company.
A recent Bloomberg TV interview with Twitter co-founder Ev Williams added fuel to the takeover fire, especially when he used the term “consider the right options.” This definitely indicates that the Twitter Board of Directors is open to acquisition possibilities.
With option prices still cheap, trading at only the 12 percentile, a call diagonal spread that positions for a potential takeover makes sense.
TWTR Stock Trade Idea
Buy TWTR Dec $18 calls and sell TWTR Oct $20 calls for a $1.65 net debit.
These are both the traditional monthly options. The spread is initially net long 25 deltas, which equates to 25 shares of stock for each spread.
Ideally, TWTR stock closes near $20 on October expiration. Maximum risk is $165 per spread.
As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the Delta Desk Research Report can email Tim at tbiggam@deltaderivatives.com.
