I have to say, Twitter Inc (NYSE:TWTR) has held up surprisingly well during the market selloff. Twitter stock has been bolstered in the past couple of weeks by reports the company is shopping itself out to potential buyers. But earnings arrive this week, and the numbers, especially guidance, could kill that momentum.
Twitter stock’s price action since August is impressive. The shares are up more than 55%, taking out former resistance at $20 and $25 in the process. The latter of these two support levels could fall in today’s extended market selloff, however.
Still, TWTR should be on your radar for a potential bullish play. Yes, bullish play.
You may remember that the last time I officially checked in on Twitter stock, my lead recommendation was a Jan 2018 $23.50/$24 bear put spread. In fact, if you had taken advantage of this trade, you could have realized a potential gain of nearly 120%.
At the time, I argued that Twitter stock was overbought and due for a correction. The shares had rallied sharply following upgrades to “buy” from both JPMorgan and Summit Redstone. Unfortunately for TWTR bulls, no further upgrades or market support materialized, and the shares were left to sink lower.
After sinking to support near $22 on Jan. 25, Twitter stock received another shot in the arm. Notorious bear Andrew Left of Citron Research came out as bullish on TWTR, placing a $35 price target on the stock. Additionally, rumors swirled that Twitter was looking for a buyer and that Salesforce.com, Inc. (NYSE:CRM) and Tencent Holdings Ltd (OTCMKTS:TCEHY) might be interested suitors.
Click to EnlargeTwitter stock once again rocketed higher, and once again found itself in overbought territory. Instead of a long, drawn-out decline, however, the broader market is helping TWTR work out its overbought status this time around.
TWTR stock is set to pull back to support in the $24-$24.50 area today, and this could be a buying opportunity ahead of Thursday’s quarterly earnings report — market willing, that is.
For the record, Twitter is expected to post a profit of 14-cents-per-share in the fourth-quarter. This is up 27% from 11 cents in the same quarter last year. Revenue is seen falling 4.3%, however, to $686.06 million. The whisper number rests at 19-cents-per share.
Aside from a heavily bullish whisper, bearish sentiment abound for Twitter stock. Currently, Thomson/First Call reports that 32 of the 36 analysts following the shares rate them a “hold” or worse. The 12-month price target also rests at $21.16, a discount to TWTR stock’s current perch. In other words, there is plenty of room for upgrades or price-target increases.
Additionally, more than 38 million shares of Twitter stock were sold short as of the most recent reporting period. At 5.79% of TWTR’s total float, this short position could create a bit of a squeeze play following a rally.
On the options front, speculative traders are mixed heading into Twitter’s quarterly report. Currently, the February put/call open interest ratio comes in at 0.70, with calls open interest down sharply over the past month. Clearly, some of this negativity is due to the market selloff.
As for implieds, February options are pricing in a potential move of more than 15% heading into expiration. That places TWTR stock’s upper bound at about $28, while the lower bound rests near $20.
Two Trades for Twitter Stock
Call Spread: Thanks to the market selloff, Twitter stock is well out of overbought territory. The shares are also pulling back sharply to support in the $24 region. A positive earnings report on Thursday, or any news on Twitter putting itself up for sale would be a bullish driver. As such, traders looking to play the bullish angle on Twitter stock might want to consider a Feb $25/$26 bull call spread.
At last check, this spread was offered at 23 cents, or $23-per-pair-of-contracts. Breakeven lies at $25.23, while a maximum profit of 77 cents, or $77-per-pair-of-contracts — a potential return of 230% — is possible if Twitter stock closes at or above $26 when February options expire.
Put Spread: On the other hand, this market selloff could have legs to run lower. Furthermore, Twitter’s earnings report is an unknown factor and there’s no guarantee that the company is putting itself up for sale. Remove any of these supports, and TWTR stock will continue to fall.
Traders taking a bearish angle might want to consider a Feb $23/$24 bear put spread. At last check, this spread was offered at 19 cents, or $19-per-pair-of-contracts. Breakeven lies at $23.81, while a maximum profit of 81 cents, or $81-per-pair-of-contracts — a potential return of more than 320% — is possible if Twitter stock closes at or below $23 when February options expire.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.