Twilio Inc (NYSE:TWLO) may not be fully out of the woods and one still heavily populated by bears. But a turnaround in the making does offer bullish investors more than just hope for TWLO stock bulls.
If you’re going to position though, using a flexible vertical call spread that also reduces and limits risk (just in case the bears still have the last word) is smart business.
Shares of Twilio surged higher Wednesday by more than 16% in the aftermath of the company’s latest corporate confessional. It was impressive but maybe also not entirely surprising.
TWLO Stock Weekly Chart
I haven’t always been a fan of TWLO stock. But nor have I been an obsessed bear. The last time that message was expressed was back at the end of August following an earnings report that produced a bearish shooting star on the weekly chart.
The interpretation was the pattern developed at the expense of high short interest covering positions. Subsequently — and with little true buy side support from bullish investors — TWLO reversed lower and looked poised to falter further after cleaning house of some bears.
The forecast did eventually pan out, but definitely longer than anticipated. What also played out was the failure of TWLO stock to move to fresh all-time-lows. Instead, a triple or perhaps a quadruple bottom was confirmed immediately in front of Tuesday night’s latest earnings report. And much like the August event, this also had the impact of rocketing Twilio shares higher.
Twilio’s price action begs the question of whether history is rhyming and shares will proceed to move lower after a strong bout of likely short-covering? Alternatively, could this finally be the start of a more bullish scenario where time (and price) have finally healed shares sufficiently to back sustainable higher prices in TWLO?
Going forward, I’m inclined to give Twilio stock the benefit of the doubt and view the turnaround on the price chart as supportive and aligned with the apparent turnaround occurring in Twilio’s underlying business.
But with an eye on downward sloping technical resistance and respecting that price spikes fueled by short interest often falter before maybe being of benefit to bulls again—it’s time to consider an appropriate options strategy for positioning.
TWLO Stock Bullish Vertical Strategy
Given the described situation above and liquidity in TWLO stock’s options, I’d suggest an out-of-the-money bull call spread. Vertical spreads are a favored strategy as they reduce and define risk, offer flexibility for future adjustments or simply great bang for the buck if shares begin to cooperate.
Reviewing TWLO stock’s calls and puts, one combination that looks attractive is the April $30/$35 call spread. With shares at $30.72, a limit order of up to $1.75 offers traders a way to keep risk contained to less than 6% of stock risk for the next couple months.
And if conditions continue to improve? Ultimately, this strategy offers a max profit of $3.25 or return of 185% if Twilio can rally 26 cents above the August earning high of $34.74 at expiration—and in the process, confirm a much stronger technical picture for bulls.
Investment accounts under Christopher Tyler’s management do not currently own positions in any securities 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.
