Considering Our Options – $TWTR Call Calendar: Subtweet

by CC June 5, 2014 2:46 pm • Commentary

TWTR has managed to hold its recent lows just below $30 on a few occasions over the past few weeks, and today flirting with last week’s one month high. A few weeks ago we placed a trade structure (below) that attempted to take advantage of the fact that TWTR is likely to need a catalyst like better than expected earnings (due in early August) for the stock to break above the pre ipo lockup breakdown level  (our view was anywhere from 30 to the IPO price of 26 would be fairly safe to buy longer term).  The trade structure looked to collect some near term premium in order to finance the purchase of longer dated calls that would capture their Q2 results.  Here was that trade from May 23rd:

TRADE: TWTR ($30.65) Bought July/Sept 35 Call Spread for 1.25

-Sold to open July 35 Call at .70

-Bought to open Sept 35 call for 1.95

With the stock almost 4 dollars higher that structure is now worth about 1.75. As far as trade management goes we’re actually more worried about a breakout above $35 than any type of move back toward $30 which we feel is the more likely scenario. A big move higher through $35 puts the structure’s profits at risk due to the fact that the short call doesn’t expire until July.

Barring a news story between now and then it’s unlikely that the stock would get much higher than $38 or $39 and to the downside breaks of $30 look unlikely. Because of that we’re going to leave the trade on and see what happens from here.

The structure currently has a delta of about +5 so it’s less a bullish trade at this point as one whose range near or far from $35 will determine the profit potential. The longer we get into July expiration with the stock near $35, the more profitable it becomes. And moves higher or below that strike the opposite.

So nothing to do now but we’ll be keeping an eye on the stock and will likely wait as long as possible before closing unless we feel a break or breakout from this range is possible.




New & Name That Trade – TWTR: Catching a Failing Whale

On Wednesday, we laid out a contrarian way to play for a bounce in the next couple months to the mid point of the last month’s range in Twitter (below), with one large caveat:

We think there is a fairly low probability that the stock is above $40 in the next couple months, without some sort of very positive unexpected event. On the downside we could see a re-test of the ipo price of $26, but again it would also take a bit more than a broad market sell off, and something specifically negative. For now we want to see the stock make another test of support and then a hold and we would be inclined to play for a mildly bullish range trade.

It is is our belief that if the stock is able to hold the post IPO lockup low of $29.50 that it will likely bang around between $30 and $35 until the next identifiable catalyst (their Q2 earnings in early/mid August) or some un-foreseeable fundamental event (corporate action or product news).

At the moment we don’t find the set up in TWTR that compelling to play for a range-bound situation given how poor its price action has been, especially its relative strength over the last 2 weeks as many hard hit social media and high valuation stocks have seen healthy bounces.  What does interest us though is looking for a relatively low risk way to play for an outsized move to the upside if in fact the company is able to tweak their existing business model and display better ways to monetize their user base, grow said user base and increase engagement.  If the company is able to not only beat on most financial metrics, which they have done in both of their two reported quarters since going public back in November 2013, but also demonstrate how they will grow and monetize their user base, then the stock could see considerable gains from current levels, despite valuation concerns.

The obvious analogy is Facebook post IPO.  As many painfully remember, FB got cut in half in the 6 months following its May 2012 IPO, as the company had not clearly articulated how they planned to monetize users who were quickly migrating to their mobile offering, away from desktop, which would be much harder to sell ads on.   The stock had similar issues to TWTR leading up to its 6 month IPO lockup, as the hundreds of million shares were an overhang and hurting sentiment.  However, once the lockup was out of the way, with many insiders saying they were holding, the stock started to work, rising 50% 3 months after lockup, and then 100% another three months later once they were able to demonstrate mobile ad sales:

Facebook May 2012 thru Dec 31st, 2013 from Bloomberg
Facebook May 2012 thru Dec 31st, 2013 from Bloomberg

So the Gazillion Dollar question is whether TWTR will ever has its Facebook 2013 Ah-Ha! moment, where after being perceived as over-valued and maybe a bit passe, investors start to see the potential leverage of the model.

I suspect that TWTR will have this sort of moment, but I can’t say from where.  My sense is that the stock probably flirts with its IPO price of $26.  As we said in the post on Wednesday, no matter what you are inclined to play for, a near term bounce to mid $30s, or now looking out bit longer and looking to make more of an asymmetric bet to the upside, I think it make sense to see how the stock reacts to a re-test of the prior lows.

If the stock does in fact break here and trades to the mid/high $20s (I suspect $26 sees a good bit of support) there are two trades that I am interested in setting up for TWTR’s Q2 results in August.  One that I am going to put on now, and one that I would put on in the event of a big break:

FIRST, the Trade that I will put on now, a call calendar, playing for range-bound action between now and July expiration, but finance the purchase of longer dated calls that capture the next earnings event:

TRADE: TWTR ($30.65) Bought July/Sept 35 Call Spread for 1.25

-Sold to open July 35 Call at .70

-Bought to open Sept 35 call for 1.95

Break-Even on July Expiration:

-Profits are maximized at 35 on July expiration. Slight moves above and below that strike are also profitable with big moves higher or lower putting the structure at risk of losses on expiration.

-Max risk is 1.25

Rationale:  I have no idea what the stock is going to do in the near term, but I know that the earnings event will be a hotly anticipated potential catalyst for the shares given how poor the current sentiment is.  August options are not listed yet for TWTR, so for the next month, Sept. will be the “own” for earnings and will hold their value far better than July, I want to finance the purchase of Sept by selling July and then look to turn Sept into a vertical by selling a higher strike call in Sept once July rolls off.

SECOND, if the stock does break the prior low t $29.50 and see a quick swoosh, the trade to play for a levered move to the upside would be a Risk Reversal, selling a downside put, and buying an upside call, and doing so for NO premium.

Here is the hypothetical trade on a breakdown, looking to sell the Sept 26 puts as that level should see a good bit of support:

Potential Trade (Not Putting On NOW):

TWTR ($30.65, ideally do this when lower) Buy Sept 26/37 Risk Reversal for Even Money

-Sell to open Sept 26 put at 1.45

-Buy to open Sept 37 call for 1.45

Break-Even on Sept Expiration:

Profits: Unlimited gains above 37, up 19%

Losses:  Put the stock below 26, down 16%, losses below that

Neutral:  Between 26 and 37 no gains or losses on expiration, but marked to market before Sept expiration you will have losses as the stock moves closer to 26 and gains the closer the stock is to 37.

Rationale:  This trade could be considered a sort of place holder of sorts as it only has about 50 deltas, meaning the position in the near term will only gain .50 for each dollar move from current levels.    What it does do though is place two limit orders to own the stock on Sept expiration, one much higher, and one much lower, saving potential losses from current levels to down 16%, while also nullifying any potential gains between current levels and up 19%.  This may seem wide but remember the stock was above $70 six months ago and this trade is one specially designed to play for a big move to the upside.