Twitter (NYSE:TWTR) shares have been decimated following their dismal earnings report. The past two days have seen the blue bird slashed 28% amid major distribution. But with the bloodshed having now brought the Twitter stock to such oversold levels, contrarians are starting to perk up.
As they should be.
Even if TWTR trends lower for the rest of the quarter, there are still bound to be some rallies mixed into to the destruction. And most will strike when prices become overstretched to the downside.
Like now.
Believe it or not, the weekly timeframe for TWTR stock remains in an uptrend despite the recent wrecking. It would take a breach of $27 to reverse the series of higher pivot highs and higher pivot lows. Beneath that the $25 zone is the next potential support zone.
Turning to the daily chart reveals the significance of $27 in greater detail. It marks a gap area that was filled in April and is likely to lend a hand to bulls if tested in the future.
The 200-day moving average is also fast approaching near $30. Because it has been so long since Twitter visited this long-term average, I suspect it will hold on the initial probe. Throw it all together and I think now is as good a time as any to begin accumulating bullish exposure.
TWTR Naked Puts
The stock’s cheap price tag coupled with my desire to build a high-probability trade has me eyeing naked puts. You can sell the Sep $27 puts for around 55 cents. Think of it as a bet that Twitter stock stays above $27 for the next 52 days. If it does, you will capture the $55 max profit (55 cents x 100 shares).
Another way to view the play is you are obligating yourself to buy shares at an effective purchase price of $26.45 which marks a hefty 45% discount to the stock’s recent peak of $47.79.
The initial margin requirement is only about $270, so the potential return on investment is an attractive 20%.
As of this writing, Tyler Craig didn’t hold positions in any of the aforementioned securities. Want more education on how to trade? Check out his trading blog, Tales of a Technician.
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