A recent earnings-related “MAU-ling” in Twitter (NYSE:TWTR) wasn’t entirely fake news. But a rather dramatic reaction by Wall Street is now good news for contrarian and value-minded TWTR stock bulls using a bull call spread options strategy.
Let me explain.
There’s a lot of fake news out there. And then there’s investors’ late July disappointment over Twitter’s monthly average user (MAU) miss. A figure of 335 million versus Street estimates of 338.5 million sent TWTR stock plunging roughly 34% in the immediate aftermath of Twitter’s Q2 report.
The bearish catalyst managed to trump Twitter’s in-line profits of 17 cents and above-view revenues of $711 million. Additional causes of alarm for TWTR investors were weaker guidance tied to increased expenditures and weaker MAU estimates as Twitter battles bad actors on its social media platform.
The panicked reaction in TWTR’s volatile price line wasn’t entirely fake news. But make no mistake about it, the move in shares certainly falls into the category of a sensationalist, short-term over reaction by investors — and an opportunity for contrarian and value-minded TWTR stock bulls.
TWTR Stock Daily Price Chart
A bearish flag that’s formed following TWTR stock’s post-earnings trend-line breakdown isn’t entirely fake news either. But nor is it the only technical truth on Twitter’s daily price chart. And that could be good news as well for some bulls.
For value-seeking investors TWTR has experienced a steep, but far from uncommon correction of 35%. It’s the kind of decline, if purchased, that can lead to great returns over time. But there’s more too for contrarian-oriented Twitter bulls to consider. Shares are currently oversold, still maintain a series of higher lows relative to the April / May uptrend and are wedged in a support zone backed by Fibonacci and the 200-day simple moving average.
Bottom-line, when it comes to TWTR stock’s squiggly line, investors shouldn’t turn a blind eye to today’s opportunistic positioning courtesy of a typically near-sighted and sensationalist Wall Street.
TWTR Stock Bull Call Spread Strategy
One favored simple strategy with defined and reduced risk is purchasing an out-of-the-money bull call spread. This type of play also has the benefit of not increasing a trader’s exposure if TWTR stock fails to find its technical footing as discussed above.
Reviewing Twitter’s options, the Oct $36 / $40 call vertical is one combination that sets up nicely. With shares at $32.98, the spread is priced for 80 cents. If TWTR stock begins to reaffirm the uptrend, a profit of $3.20 or 400% is possible at expiration above the sold $40 strike call.
Additionally, with a decent amount of time on the calendar and those gains not reliant on new highs or even an earnings gap needing to be filled, this bull call spread looks decent. Lastly, with exposure of less than 2.5% versus the risk of owning TWTR stock, without needing the benefit of hindsight, that type of protective value can certainly come in handy at times.
Disclosure: 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.
