A couple of earnings ago, I sold puts into Twilio Inc. (NYSE:TWLO) earnings report. The reaction to those May earnings was horrendous and the stock fell 25% on the event. Luckily, I had purchased that week’s same level put for a nickel. Those sacrifice puts saved my trade, and I came out a winner.
Today I am taking my position into Twilio stock AFTER the event. I didn’t want to get caught in another swarm of short-term trading actions which may have nothing to do with the company’s long-term fundamentals.
TWLO stock came into yesterday’s earnings down 4% on the year. Though not a disaster, this is bad given that markets are setting new highs all year long. The tech-heavy PowerShares QQQ Trust (NASDAQ:QQQ) is up 30% for the same period.
Wall Street experts have been in a holding pattern on the stock. Most have a buy rating on the stock, yet TWLO was trading 25% below their average price targets. It’s even 10% below the lowest of the ratings. So they offer me no insight about the company except that they haven’t given up on the stock.
This morning the stock is looking to trade higher and on a down market day. So traders liked what they saw in the earnings. This is bullishness I can trade but without chasing a particular upside target, especially after the August earnings pop fizzled.
I do have to consider the fact that the longer price lingers this far off those targets the more likely they are to reset them lower. Those headlines will cause a dip if and when they come. I am not forecasting that this will happen but I have to account for the possibility.
Since the time of the crash after the May report, TWLO spent six months clawing its way back up. It perfectly filled the open gap to the penny. But then exactly at that point it started its decent back to the half-back point.
At $27.80, it was in danger of losing the higher low trend line which if occurs could target $23 area. And therein lies my opportunity. I want to generate income from what others fear.
Click to Enlarge So, today the stock is near $30 per share which is the middle of the 12 month main range. This is the center of the May crime scene and it could pose problems for the bulls. Contentious zones tend to be sticky.
I am not eager to chase upside price targets but and I am willing to sell downside risk against the level that has been tested hard three times.
I will not bother arguing for value since there is none tangible from the price to earnings perspective. So I consider today’s trade a bet on the price action for the next few months. This trade is somewhat speculative for that reason.
TWLO Stock Trade Idea
The Trade: Sell the Dec TWLO $23 put. This is a bullish trade for which I collect 60 cents to open. I have an 80% theoretical odds that I will win. But if the price falls below $22.40 I would accrue losses.
Selling naked puts carries big risk. For those who want to mitigate it, they can sell a spread instead.
The Alternate Trade: Sell the Dec TWLO $23/$22 credit put spread which would yield 15% on risk for about the same chances of success.
It is important to note that neither set ups requires a rally to profit. In fact TWLO stock can fall another 20% and I could still retain maximum gains.
Ultimately, regardless of how careful I am, investing in stocks is fraught with danger, so I never risk more than I am willing to lose
Get my newsletter for free 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.
