Twitter Inc (NYSE:TWTR) has traded in waves for the past two years. That’s because Wall Street can’t make up its mind on how to gauge the success of management. To me it’s simple … They continue to fail at monetizing a valuable platform and they have almost no chance of succeeding from a fundamental basis.
Don’t get me wrong, I love TWTR the platform. My contention is with who is running the operation … and how. They are serial disappointers, as if they specifically seek ways to purposefully fall short of expectations.
The only viable option is for someone else to buy them and that’s where I’ve profited from it.
Even though I am critical of their fundamental prospects, I have only traded TWTR stock from the long side. In general, most traders have tried and likely given up chasing the headline. They buy the stock or call options and hope it rallies. Except for short rallies it has been a disappointment to many. Unlike them, I strictly sold puts on dips, so I have yet to lose on my bets. I have no out-of-pocket expense with any of my trades.
Click to Enlarge My thesis today is to profit from the stock price action, and I see technical upside potential. No, I am not going to buy and hope TWTR rallies. Instead I will sell downside risk below proven support to generate income out of thin air.
This technical upside is visible on most charts, but unlike most traders I will use it to pay me to open the trade and not the other way around. In addition, most analysts have a hold or sell rating on TWTR. This is good news since it decreases the threat of downgrades. Analysts tend to upgrade stocks after the fact.
I can’t speak to the value of TWTR stock since there is none. But I can rely on the perceived value that is inherent in the potential buyout headline. For as long as there is hopes of it, if Twitter crashes again, it will find footing. This is critical to my trade strategy.
TWTR Stock Trade Idea
The Trade: Sell TWTR Dec $14 naked put and collected 40 cents per contract. This is a bullish trade which has a 90% theoretical chance of success, but if the price falls below my strike then I must own the shares. I would then accrue losses below $13.60.
Those who want to mitigate the risk that comes from selling naked puts, they can use spreads instead. There they limited the maximum losses by the width of the spread.
The Alternate Bet: Sell TWTR Dec $14/$13 credit put spread for the chance of yielding 20% on risk.
Either of these setups would make me long Twitter, but in a way that doesn’t not require a rally. I can collect maximum profits even if the price falls 15%. But, I can add a long call position to capture more profits if Twitter stock lives up to the technical upside potential.
The Twist (Optional): Buy the Dec TWTR $17/$18 debit call spread where I have a chance at more profits. As long as the price stays above my sold puts then any premium that I recapture from selling the calls would be pure profits. I don’t have to hold any of these through expiration. I can close them at any time for partial gains of losses.
Investing in stocks never comes with guarantees, so I never bet more than I can afford to lose.
Learn how to generate income from options 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 @racernic on Twitter and Stocktwits.
