Following the latest earnings confessional from Twilio Inc (NYSE:TWLO), the prospects going forward are increasingly bullish-looking off and on the price chart. But while TWLO stock is now much closer to being fully out of the woods, lingering risks still dictate using a protective and versatile bull call spread in lieu of buying shares. Let me explain.
Shares of Twilio stock spiked up by 18% to fresh intermediate highs Wednesday on the heels of the tech communications outfit’s better-than-expected earnings report for its first quarter. Wall Street cheered and more than a few bears jeered, but likely in grudgingly acquiesced to the company’s stronger-than-forecast sales growth of 48% on sales of $129 million.
Another positive aspect is that, despite increased investment for the period, new customer wins helped Twilio further unwind its one-time significant reliance on embattled customer Uber Technologies. The solid revenue growth also helped TWLO stock top earnings estimates by three cents, delivering a narrower-than-expected loss of just 4 cents per share, which matched last year’s result.
Twilio Stock Weekly Chart
TWLO stock may not be fully out of the woods with all investors just yet, but conditions do favor a continued rally and eventually new all-time highs. Wednesday’s bullish earnings reaction jettisoned Twilio shares through its lifetime cycle 50% retracement level and into the upper half of its large corrective cup-shaped base. That’s bullish.
In the here and now — and given the strength of yesterday’s price spike — Twilio shares are pressuring the 62% Fibonacci level. Along with a short-term overbought condition, the combination could result in a bit of backing and filling before an anticipated move higher. However, it’s also far from guaranteed that that is how conditions will play out in the days ahead.
It’s likely some of Twilio’s heavy short interest is aware of the current technical challenge. I’d also guess some of those bears will use the Fibonacci level as a last line of defense. Bottom line, an overbought condition could easily beget more extreme behavior as another key resistance level is quashed and simultaneously continues to build the technical case for TWLO stock bulls.
TWLO Stock Long Bull Call Spread Strategy
Given the described situation, I’m favoring an out-of-the-money bull call spread. Vertical spreads are a great way to get long a stock like TWLO while vastly reducing and limiting one’s exposure. This type of combination also offers flexibility for future adjustments and allows a trader an easy way to get the best bang for their buck.
Reviewing TWLO stock’s calls and puts, one favored vertical is the June $55/$60 call spread. With shares at $52.41 the spread is priced for $1.15. That’s the equivalent of keeping one’s risk down to about 2% of the current share price. The insurance policy is nice to have in a stock that is known for its volatility, especially since Twilio may not be entirely out of the woods.
At the same time, in the event those fears are chopped down, a significant profit capture of $3.85 and return of 334% is enough to make a Twilio stock bull blush.
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.
