Whether you’re on the left or right side of the aisle, both Twitter (NYSE:TWTR) and Facebook (NASDAQ:FB) are on slippery slopes on the price chart. And for traders right now, the only agreeable course of action in these two social media giants is a bearish pairs trade using spreads on TWTR stock and FB stock. Let me explain.
It has been a hard few weeks for Twitter and Facebook bulls. Both social media platforms took dizzying hits following mixed but disappointing earnings reports punctuated by concerns over weaker user growth. The voting machine that is the market sent TWTR stock reeling by 21% and FB stock tumbling 19% in a single session.
TWTR stock and FB stock did see modest price recoveries in the days following their extreme earnings reactions. More recently, though, political theater out of Washington concerning Twitter’s and Facebook’s roles and missteps in letting bad actors like Russia taint 2016’s Presidential election has left a bearish mark on shares that doesn’t look like fake news.
Social Media Short No. 1: TWTR Stock
I like to be optimistic and opportunistic following extreme trading incidents like TWTR stock. And in fact, shortly after the earnings reaction I was bullish on shares. But Twitter has taken a turn for the worse and as a trader, moving across the aisle to a more attractive bear camp looks prudent.
Despite having corrected 38% from its June high this past week saw TWTR confirm what I’m willing to concede is a bear flag on the price chart. With the price action also failing the 200-day simple moving average and 50% retracement level; I’m also willing to see Twitter shares as one to position short in anticipation of even lower prices.
Twitter Stock Options Strategy
I like approaching TWTR stock with a slightly out-of-the-money bear put vertical. One favored combination is the Oct 26 $30/$27.50 put spread. With shares of Twitter at $30.49 the spread is priced for $1.
A vertical like this reduces and defines the trader’s risk. It also doesn’t open up the trader to additional risk in the event of a rally beyond the 3% paid to enter the position. If TWTR stock begins to hit new relative lows, up to $1.50 of profit can be captured at expiration below $27.50 and slightly beneath the 62% retracement level.
Social Media Short No. 2: FB Stock
In our view it’s easy to “like” FB stock as a short. That has nothing to do with politics and everything to do with a chart sporting a strong bearish lean. Evidence of weakening user growth and another round of political grilling has left shares in the claws of meddling bears and there’s little in the way of technical support right here to impede their progress.
The next logical point where Facebook shares may find buyers is in-between $142-$150. The area holds the 38% retracement level from FB’s all-time-low to high, as well as a challenge of this year’s first political-induced sell-off. Still, if investors grow wearier of Facebook, a more significant correction to $130 or even $120 certainly isn’t out of the question.
Facebook Stock Options Strategy
Regarding a mostly bearish play in FB stock, a below-market put butterfly spread looks interesting. Specifically and with shares near $163, the Nov $155/$135/$115 put combination for about $3.15 is liked by this strategist.
For around 2% of the risk associated with shorting Facebook shares, this trader maintains an expiration profit zone from $118.15 to $151.85 — one that could yield as much as $16.85 if FB stock landed at $135 on expiration.
Bottom line, the max profit capture isn’t very likely. But large gains certainly are, and with the butterfly’s profit area surrounding the aforementioned price supports on FB stock’s weekly chart; there’s good reason to like this strategy as a bear today, but perhaps as one willing to move across the aisle into the bull camp at aggressively lower prices.
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.
