Twitter Inc (NYSE:TWTR) stock trades in violent spurts. In April, it spiked 30% then quickly gave back half, only to rally back up 10% in mere weeks. Just yesterday TWTR stock spiked 3.5% but then gave up most it to close +0.6%. Today I will share a trade to benefit from the see-saw without chasing price targets.
Traders have a love-hate relationship with TWTR stock. Most of us love the platform. I use it every day, as it is my only source of news.
But on the other hand, I can’t stand how incompetent management has been in leveraging their asset to create profits.
I won’t argue for TWTR stock’s fundamentals here, and I don’t need to. I am strictly focused on the potential that is in the stock but only from a buyout headline. Twitter is too valuable of a global platform that someone is likely to buy it eventually… Maybe. But maybe is all I need. This creates a put below just from the notion of an impending headline.
I have successfully traded TWTR from both sides, long and short. But in all cases it was never to chase hope. On the long side I usually sell risk below support when Wall Street sells the stock as evidenced by this trade that delivered quick profits out of thin air.
Today I want to repeat performance but for a specific purpose. I want to generate income by selling downside risk in TWTR because I see a potential opportunity that I may want to capture. Typically traders see a potential spike and they buy long and hope it happens. I am not that guy. I have faith that management will continue to disappoint us.
Click to Enlarge In the absence of value, the only reason I dare selling puts in TWTR stock is that the hope that Wall Street has for a buyout keeps a floor under the stock.
Technically, there is upside potential around $18.70. Yesterday’s candle touched that neckline but failed. If by chance they can take that out, TWTR has the chance at $20. But the bad news is that the neckline has been a failure level of late. That’s another reason why I am not a buy-and-hope investor.
TWTR Stock Trade Idea
The Trade: Sell TWTR Jan 2018 $14 put and collect 75 cents to open. Here I have an 80% theoretical chance of retaining maximum profits, but if the price falls below my strike I will own the shares and would accrue losses below $13.25.
Selling naked puts is not for all investors. Those who don’t want to risk owning the shares can sell a spread instead. There, the risk is limited.
The Alternate Trade: Sell the TWTR $14/$12 bull put spread where I have the same theoretical chance of success but with limited risk. If successful, the spread would yield 25%. In either of these setups, I can profit from TWTR even if it falls another 20% from here. With earnings drawing near, I may need the buffer.
The Juice (Optional): If I see TWTR’s price challenge the aforementioned neckline, then I could chase the potential by buying debit call spreads. But I am not one to start here. I need to see confirmation of the breakout.
Selling options is risky, so I never expose my portfolio to risks that would break me.
Learn how to generate income from options . Nicolas Chahine is the managing director of . As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at and stocktwits at .
