The Twitter Inc (NYSE:TWTR) comeback rally has to be more than a little surprising to the talking heads in the mainstream financial media. Just a few months ago, many analysts and commentators were proselytizing the need for a TWTR buyout or bankruptcy. Lately, though, the doom and gloom for Twitter stock has faded into the background. A nearly 40% rally has largely silenced critics.
Click to Enlarge But not everyone has capitulated to the uptrend, leaving a bit of room for shares to run in the short-term.
Technically, Twitter stock is set to give technical traders something to think about today. Shares are set to breach $20 for the second time since August. Additionally, the 50- and 200-day moving averages are set to make a golden cross — a very bullish technical signal.
For the brokerage community, a continued rise for TWTR stock means that many analysts will have to either capitulate to the uptrend or double down on their bearish stance. Currently, Zacks data indicates that 22 of the 26 analysts following Twitter rate it a “hold” or worse. Additionally, the 12-month price target of $16.93 represents a discount to TWTR’s current perch north of $20. Any upgrades or upward price-target revisions could add to the current uptrend.
Short sellers are feeling the pinch. During the most recent reporting period, the number of TWTR shares sold short dropped by 3% to 56 million. A firm close north of $20 could prompt more shorts to abandon their positions. With 9.5% of TWTR’s float sold short, there is plenty of potential fuel for a continued short-squeeze.
Short-seller nervousness is also bleeding into the options pits. During the past couple of weeks, the September/October put/call open interest ratio has edged steadily lower, as calls are added at a faster rate than puts among short-term options. The current ratio rests at 0.52, with calls nearly doubling puts. However, TWTR is set to leave the largest portion of these calls in the rear-view mirror. That’s because 48,000 call contracts reside at the Sep $20 strike.
Twitter bears might suffer more pain on the horizon. September implieds are pricing in a potential move of about 7.9% before expiration on the 16th. This places the upper bound at $21.58, while the lower bound lies at $18.42. A reversal at this point would be the expected move, given the wealth of bearish sentiment, but a rally could be exacerbated by an unwinding of negativity, potentially setting the bar higher than implieds are currently pricing in.
In other words, a bullish play on Twitter stock has considerable profit potential at this point.
2 Trades for Twitter Stock
Call Spread: For those traders looking to take a chance on a continued rally for TWTR, the Sep $21/$22 bull call spread offers a considerable return. At last check, this spread was offered at 18 cents, or $18 per pair of contracts. Breakeven lies at $21.18, while a maximum profit of 82 cents, or $82 per pair of contracts, is possible if Twitter stock closes at or above $22 when September options expire.
Put Sell: A more conservative play for TWTR’s short-term would be to sell out-of-the-money puts and profit from an unwinding of volatility. Traders looking for such a play on TWTR stock might want to consider a Sep $18 put sell position. At last check, the $18 put was bid at 12 cents, or $12 per contract. On the upside, traders will keep the initial premium received as long as TWTR stock closes above $18 when September options expire at the end of next week. The downside is that should TWTR trade below $18 ahead of expiration, traders could be assigned 100 shares for each sold put at a cost of $18 per share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
