Twitter Inc (TWTR) stock has been on a slide since 2015 highs. In December 2013, Twitter stock was $74 per share.
I tried twice to catch the falling knife by buying calls to no avail. Now it’s relegated to trading in the low teens.
TWTR is a broken stock with very little technical conviction in either direction. There are no obvious reliable levels against which to trade. Year-to-date, Twitter stock is down 35%. It recently set a new all-time low.
Surprisingly, on Wednesday, while markets were down 0.6%, TWTR gained 6%. I want to short this price action for a trade and with very limited risk.
TWTR Stock Trade
I have been on record saying that someone will figure TWTR out. But that has gone too long without any action. I have no faith in TWTR management helping the stock price, but I truly believe that TWTR platform is too valuable to die. So if management continues to fail, TWTR should get bought out.
Until then I want to try and short this spike with little money out of pocket.
Click to Enlarge My opinion of the platform value makes me inherently long-term bullish Twitter stock. Current low borrowing rates have so far not enticed any buyout offers, not even under $14 per share.
I know that the likelihood for an offer would be much greater 20% lower.
For this trade, I could sell Twitter stock and leave myself open to unlimited risk. Instead, I will resort to the options markets, where I can structure a bearish setup against this spike without much money out of pocket.
Trade No. 1: Buy the Twitter June 3 $14.50 put. This is a bearish trade for which I risk a maximum 65 cents per contract to open. I stand to profit if TWTR stays below $14.50 per share between now and June 3.
Since I like to reduce my out-of-pocket expense whenever possible, I will add another trade to do so. This will allow me to collect premium to offset expenses of the first trade.
Trade No. 2 (Optional): Sell TWTR Jan $10 put. For this I collect 75 cents per contract. This has an 80% theoretical chance of success and a 30% buffer from current price. The net effect of both trade is a slight credit, so if Twitter stock continues rising through January, I am left with that small credit.
By selling naked puts in TWTR, I am stating that I will willing to own the stock at that price should it fall below $10 per share this year. Twitter stock at $10 per share will be much more attractive to a buyout, so it wouldn’t be much of a risk then.
Using June and January contracts does not bind me to the duration. I can close any of these options trades for partial profit or loss.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities.
