- Twilio (TWLO) is reporting earnings on Wednesday after the market close.
- TWLO stock has a history of significant moves in response to quarterly announcements, so shareholders need to buckle up.
- Potential buyers should wait until the smoke clears before purchasing, or use options to play the volatility.
The next quarterly report for Twilio (NYSE:TWLO) arrives on Wednesday after the closing bell. TWLO stock enters the event 72% off its highs and desperately needs a lifeline. Better than expected numbers or a rosy forecast would be a godsend. Of course, it’s not what the company says as much as how the stock price reacts that matters most.
Its recent track record following previous reports is uninspiring. Couple that with the nasty sentiment surrounding growth stocks and the tech sector, and it provides little reason for optimism. If you’re inclined to make a bet into earnings, the intelligent way to play is to sidestep direction and game volatility instead. It’s more predictable and at least gives you an edge.
Let’s look at the price chart and how much movement is expected Wednesday night. Then, I’ll share an options strategy you can use.
What’s Happening With TWLO Stock?
It takes a sustained selling campaign to pull a stock down 72%. This isn’t some brief bear raid but a long-lasting fall from grace. Unfortunately for Twilio, it belongs to the “high beta growth” club, which began a secular decline early last year. The San Francisco-based Cloud Communications company boomed from the work-from-home trend that took the world by storm following the pandemic. But, like so many other tech companies, it pulled forward too many gains, setting itself up for a nasty re-pricing. Early last year, investors caught wind of rising inflation and the necessary rise in interest rates and decided to abandon growth stocks in droves.
The higher cost of capital creates a higher discount rate for future profits. In other words, Twilio’s potentially big profits in five to ten years aren’t worth as much today, with interest rates at 3% as they were when rates were zero.
TWLO stock enters Wednesday’s report with ominous technicals. The price trend is in a death spiral below all major moving averages. Short of a few up days, the stock has moved straight down for the past month. It’s oversold, sure, but that has hardly been a good reason to buy for the past year.
Even if it does pull a rabbit out of the hat and dazzle investors, it will be hard to trust a rally. Last quarter saw shares leap 15% overnight only to get smacked down right at the open. Overhead resistance will likely weigh heavily on any up gaps this week too.
Use Twilio Stock Options to Trade Earnings
Guessing the direction of the gap is a fool’s errand. You don’t have an edge. Instead, you can bet on the magnitude of the move. The options board is pricing in an $18 or 16% move. Roughly 68% of the time, the stock lands within the expected move. You can go short volatility and profit if TWLO stock moves within the expected range, or you can go long volatility and profit if it moves more than expected.
Here are two trade structures to consider.
Short Volatility Trade: Sell the 20 May $85/$80 bull put and $150/$155 bear call for $1.03.
This creates an iron condor that profits if TWLO remains between $85 and $150. The max gain is $1.03, and the max loss is $3.97.
Long Volatility Trade: Buy the $85/$80 bear put and $150/$155 bull call for $1.03.
This creates an inverted condor that profits if TWLO rises beyond $155 or falls below $80 by expiration. The max loss is $1.03, and the max gain is $3.97.
On the date of publication, Tyler Craig did not have (either directly or indirectly) any positions in the securities mentioned in this article.