Twitter Inc (NYSE:TWTR) stock is at a fraction of its highs from three years ago. Along the way down, most of us investors have been frustrated trying to time a buyout headline.
Chasing price targets is difficult enough on its own. Doing it in a company where management is committed to disappointing everyone is nearly impossible. The fundamentals in TWTR almost don’t matter. Most traders have given up on that aspect. They are mostly chasing a headline — the headline of a Twitter buyout finally coming.
Click to Enlarge Like most of Wall Street, I have zero faith in TWTR’s current management. So I am not looking for a turnaround in metrics or financials.
But that doesn’t mean I can’t trade it with relative confidence.
How to Trade TWTR Stock Here
Instead of chasing price targets, I find it easier to identify support levels against which I can sell risk. In this case, my thesis is that hopefuls will buy extreme dips in Twitter stock. They will be motivated by the notion that it just could be cheap enough for a buyout.
This is not the same as investing in the buyout. Instead, I am selling risk based on other people’s hopium of a headline that may never come.
The Bet: Sell the TWTR Sep $12 put. I collect 60 cents per contract for this bullish trade. I have a 75% theoretical chance of my risk expiring for maximum gains. If TWTR stock falls below my strike, then I’d be committed to buying it. Anything below $11.40 per share would accrue losses for me.
Usually I like to balance my bets by selling opposing risk in TWTR. But in this case that would defeat the purpose. What if the headline actually hits … Then my hedge would be in deep trouble.
Given the size of the buffer from current price and the time until expiration I feel confident that I will be able to manage the risk against short term price gyrations. I do have to note that TWTR stock is technically vulnerable; a dip below recent lows could trigger a test of $13.
Learn options as easy as 1-2-3 here. 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.