It’s a “brain drain” at Twitter Inc (NYSE:TWTR) ripped straight from today’s headlines. But getting past the latest bearish media swipes, TWTR stock is a no-brainer for contrarian-minded bulls and one worthy of a modified fence for smart money Twitter options traders. Let me explain.
Twitter is back. It’s not the first time that’s been proclaimed. In fact, this strategist stated as much back on May 12. And guess what? Despite shares having dipped lower over the period, Twitter’s bullish prospects are maybe even more so worth more than just a tweet.
Among the proliferation of warnings of problems at Twitter and for TWTR stock, I’ll remind readers of April’s better-than-expected corporate confessional, showed in more than one way, that Twitter is in the process of making a successful turnaround.
Now and amidst the legion of short interest and a still very bearish-leaning Street that’s in prime position to be caught flat-footed and potentially chasing shares higher, it appears analysts from Cleveland Research are becoming agreeable after having been cautious on Twitter the past couple years.
Behind Wednesday’s 5% push higher, the firm reaffirmed last quarter’s earnings report noting “constructive feedback” from advertisers on its live content and Twitter successfully improving its business strategy and execution.
The bullish note wasn’t all puppy dogs and rainbows as Cleveland is of the mind that ad growth dollars will be a challenge for Twitter. Nevertheless, much like Rome wasn’t built in a day and knowing inviting RSVP’s are the exception and not the rule with trading; this strategist can’t help but like the information Twitter’s stock chart is conveying behind the scenes even more.
TWTR Stock Daily Price Chart
Click to Enlarge Since discussing the stock price of TWTR back in mid-May, shares have sunk lower after initially swinging to fresh six month highs. That’s the bad news. The good news and worthy of more than just a simple tweet is with Wednesday’s price action, confirmation of a meaningful low has been established.
With shares of TWTR up a bit more than 5%, the price action supports a technical low established over the past two weeks which found the backing of the prior downtrend channel.
From here, with a first higher-low pattern established and a favorable stochastic situation, the expectation is for the next directional reaction to push shares above $20 to form a second higher-high pivot and more evidence; this time (and finally) is different for Twitter.
Twitter’s Bullish Modified Fence
Given the overall bullish view a turnaround is occurring off and on the price chart for TWTR, I like the idea of using a modified bullish fence strategy.
Specifically and after reviewing the Twitter options board, the combination of selling the Aug $16/$15 put spread and buying the August $20/$22 call vertical is priced attractively for a debit of 10 cents with TWTR stock at $17.88.
What’s this package do for would-be and bullish-minded traders? First and at expiration, down to $16 and over the next two months, risk is contained to the 10 cent debit. That’s a margin of safety of about 11% relative to today’s share price in TWTR.
Below $16, the combo’s risk is defined by the $1 put spread and debit paid. Thus, $1.10 is the max loss for the position or roughly the equivalent of 6% of owning stock in TWTR outright. That’s a reasonable risk allowance, especially given earnings are embedded in the August life-cycle.
Also, if a trader were inclined to own TWTR at a discount, the risk taken on makes that sort of decision a good deal more palatable during the life of the spread.
On the upside, if TWTR remains below $20 the debit is lost as both spreads go out worthless. However, as the combination is long deltas, if shares begin to move higher, the spread is in position to gain value due to the allowance of time premium.
Above $20 and the call vertical ultimately begins to take on intrinsic value penny-for-penny and dollar-for-dollar with any increase in TWTR shares up to $22 at expiration. Thus for 10 cents, the trader has the potential to land $1.90, or 1,900%, if shares are able to improve upon last month’s high point by 11%.
Bottom line, this modified fence isn’t a no-brainer per se, but for contrarian-minded bulls, the idea looks like a smarter money play in lieu of buying TWTR stock.
Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.