In a land led by large-capitalization tech stocks, it’s easy for the little guys to get swept under the rug. Such, I suspect, has been the sentiment surrounding Twitter (NYSE:TWTR). That’s one reason why its ascent has flown under the radar. But with Monday’s clearing of $40 pushing the bluebird to a new 10-month high, bulls can’t ignore TWTR stock any longer.
Today we’re taking a closer look at Twitter’s flight path to discover why the next stop could be $45. Then, I’ll share my favorite options strategy for exploiting the continued advance.
The Messy Tale of Twitter’s Stock Chart
All it takes is a single glance at Twitter’s weekly chart to discover why its popularity hasn’t risen to the level of Facebook (NASDAQ:FB) or Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG) for traders. The price action has been a choppy mess for over two years. We’ve seen multiple attempts to start a trend, but all of them proved fleeting. Once we drill down to the daily time frame, you’ll discover there are gaps galore littering the landscape. This type of chaotic nonsense leaves spectators skittish and unwilling to leave the safety of the sidelines.
The weekly moving averages echo the sideways trajectory of TWTR stock’s trend. The 50-week moving average is falling while the 200-week reading is rising ever so slightly. If you’re looking for a silver lining, it’s the ascending 20-week. Believer it or not, Twitter has doubled off the March lows, pulling the weekly trend higher with it. The next major resistance pivot is around $45, making it the logical upside target.
As usual, the daily view provides greater detail to Twitter’s breakout. The doubling since March has been powerful enough to turn the trend across all time frames higher. In other words, with the 20-day, 50-day, and 200-day moving averages climbing, the trends from short-term to long-term are pushing northbound. It’s the type of posture that should have trend traders finally warming up to Twitter.
When analyzing breakouts, traders like to apply a few filters to gauge how likely the resistance breach is to stick. One of them is volume. The more buyers that swarm, the better. Monday saw the number of shares changing hands swell past 20 million, officially notching the highest accumulation day we’ve seen since July’s earnings report. I take that as a good sign, one that increases the chances that we see further follow-through.
A Pair of TWTR Stock Option Plays
The beauty of the options market is it provides unlimited paths to play. In the case of Twitter’s breakout, I see two strategies that interest me. One offers higher odds of success with a modest margin of error. The other strikes a more directional tone. What you sacrifice in probability is made up by potential profitability.
The first trade is selling an out-of-the-money put option. Consider it a bet that the breakout holds, and we remain above $37 for the next month.
Trade One: Sell the Sep $37 put for 60 cents.
The initial margin required should be around $450. You will capture the max reward of $60 per contract if the put expires worthless. That’s approximately a 13% return. If it sits in-the-money at expiration, then you’ll be obligated to buy 100 shares at $36.40. You can either allow assignment and purchase shares or exit the trade if TWTR stock breaks below $37.
The second trade is a bull call diagonal. It doesn’t have as high of a probability of profit as the naked put, but the potential return on investment is far better.
Trade Two: Buy the Oct $38 call while selling the Sep $42 call for around $2.95.
If Twitter rises past $42 near expiration, then your profit should be over $100, which translates into a 34% return.
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