When I first started trading Twitter Inc (NYSE:TWTR), I worried about fundamentals like user counts and traffic monetization. Since then, and like most of Wall Street, I gave up on studying Twitter’s fundamentals. Management proved to me over and again that they are incapable of turning a profit.
This lack of interest from traders caused a big slide in TWTR stock but therein lies my gold mine. The benefit of the stock demise is that consensus became that Twitter is now cheap enough to attract a buyout. Unfortunately, this fact is a delicious trap for most call buyers.
I have a better way to profit from TWTR. I have already shared several write ups on how to make Twitter stock pay me without much drama.
Today I want to set it up again so I can profit from TWTR for free. The idea is to sell risk at levels that I deem safe enough. Luckily, the options markets offer hundreds of ways I can accomplish this and to suit all risk appetites.
The Trade: Sell the TWTR Sept $13 put. This is a bullish trade for which I collect 90 cents to open. This has a 70% theoretical chance of success with a 22% price buffer from current level. I only sell naked puts if I am willing and able to own TWTR stock at the strike sold. If TWTR holds above my strike, the position expires for maximum gains. How can I lose? If TWTR falls to a new all-time low (anything lower than $12.10 per share) and I accrue losses.
I could juice this up by using the premium collected to buy calls or call spreads. But I personally have no faith in management, nor do I believe that it’s under imminent threat of a buyout.
The Juice (optional): But if I were forced to buy calls, I would do the $17/$18 debit call spread for March contract. It costs 35 cents per contract for the opportunity to more than double. As long as TWTR stays above the sold put, ANY premium collected from selling the debit call spread would be pure profit.
Selling naked puts is not for everyone. I could modify the trade to have finite risk.
The Alternate: Sell the TWTR June $13/$12 credit put spread. This is a bullish trade for which I collect 18 cents per contract. This gives me a chance to yield 20% with an 80% theoretical chance of success. All I need is TWTR stock stay above $13 while I hold the position.
I do need to note that TWTR has bearish technical patterns looming just below current levels. If breached, they could cause grief to TWTR longs. I am not obliged to hold any options position open through its expiration. I can close any of them at any time for partial gains or losses.
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.