Last May, Twilio Inc (NYSE:TWLO) was hammered down 25% on earnings. But by the next earnings report, TWLO stock had redeemed itself and recovered the entire dip. Unfortunately for the bulls, the spike didn’t last long. As of yesterday, the stock was back almost halfway to the depth of the May debacle.
On the May dip, I was fortunate to profit from Twilio stock. Here it is again, giving longs a hard time.
Yesterday, TWLO fell almost 7%. At these levels, I question my conviction in trying to catch this falling knife once more.
Fundamentally, it’s hard to gauge a company that operates in the red. Usually they are growth oriented, but that too is in danger for Twilio stock. So I will put stock in what the analysts think of it. They are almost unanimous in rating it as a BUY. And since it’s trading below the lowest of their collective price targets, I will assume that there is value in the stock.
It’s important to note that this is different than me saying it’s too cheap. I’m only interested in this perceived value to act as support for TWLO stock through 2017. Therein lies my opportunity. Today I want to sell downside risk against what should be support. This would allow me to profit for free, and I won’t even need a rally to do it.
Technically, TWLO stock has been volatile. Case in point, year-to-date it’s up 4%, but over the past 12 months it’s down over 50%. To trade momentum stocks this violent I only use options. Because they move too fast, they make it almost impossible to have great timing. Using options allows me to build buffers zones so I don’t have to be too surgical in picking entry points.
Yes, Twilio stock is a scary knife to catch in mid air, but if I choose the right levels, I can sell downside puts for income and leave plenty of room for error. Even in the worst case scenario, I would own TWLO stock near its IPO levels.
Bottom Line on TWLO Stock
The bet: Sell TWLO Oct 27 $24 put and collect 40 cents to open. Here, I have an 80% theoretical chance that I retain maximum gains. But if the price falls below my strike, I would accrue losses below $23.60.
If I don’t want the risk that comes with selling naked puts, I would sell a spread instead. There, the maximum loss is smaller.
The alternate bet: Sell TWLO Oct 27 $24/$23 bull put spread where I also have 80% theoretical odds of yielding 15% on risk. Compare this with risking $27-per-share here and hope that it rallies 15%, just to match the performance of the spread.
I consider this to be a speculative trade inside a conservative portfolio, so I keep my risk size small enough so that I don’t break my heart or my piggy bank. I have shared similar trades before, which resulted in easy wins, so this should be a rinse-and-repeat setup.
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 him as @racernic on twitter and stocktwits.
