Trade Update w/ New Trade- $TWTR: Closing Call Calendar For Gain, Rolling Up & Out

by Dan June 12, 2014 11:04 am • Commentary

A few weeks ago when TWTR was $30.65 we laid out 2 ways to play for a bounce off of support, one very bullish and the other mildly bullish.  At the time we opted for the mildly bullish as we expected the stock to be  range-bound between the low and mid $30s as the stock work through continued overhang and nagging issues about user engagement and growth.

Today’s gains in the stock on news that TWTR’s COO is leaving the role, but will remain an “adviser” to the CEO, has been met with some odd enthusiasm. But the price action signals that the negative sentiment towards the stock might just be abating.

We now want to adjust our existing position so that we’re not beholden to the stock straddling the $35 strike where the trade would be most profitable on July expiration. A continued move higher from here would lessen the trade profit potential or possibly turn it into a loser.  Therefore…

we are going to close the July/Sept calendar for a gain and roll the profits into an out of the money call spread in September that would capture any dramatic move above the $40 resistance level:

Action: TWTR ($37) Sold July/Sept 35 Call Spread at 1.85 for a .60 gain


NEW TRADE:  TWTR ($37) Bought to Open the Sept 40/50 Call Spread for 2.10 (effective price 1.45 in the roll)

-Bought Sept 40 call for 3.00

-Sold Sept 50 call at .80

 Break-Even on Sept Expiration:

Profits: between 42.10 and 50 make up to 7.90, above 50 make full 7.90

Losses: between 40 and 42.10 lose up to 2.10, below 40 lose full 2.10

Rationale: We remain mildly bullish on the stock and think that the company’s Q2 earnings report has the potential to serve as a significant positive catalyst for the stock if the company is able to demonstrate greater user engagement/growth. But that’s a big IF so we prefer to play with defined risk.  While this roll is adding premium with the stock higher than where we initiated, essentially averaging up, the stock has demonstrated strong potential that a bottom is in place, thus giving us greater conviction.  We are now using the profit from the prior position and making a longer term bullish bet.








Original Post May 23rd, 2014: 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.




Previous Post May 21st, 2014:  Name That Trade – TWTR: A #buy @support?

Twitter’s high volume selling on May 6th, after the end of the lockup period was on the highest volume in the stock’s history (higher than the IPO day).  The breakdown below the $38-$40 support area is unlikely to be recovered easily in the coming months, given all the overhead supply above there.  In other words, that’s huge resistance going forward:

TWTR daily chart, 50 day moving average in pink, Courtesy of Bloomberg
TWTR daily chart, 50 day moving average in pink, Courtesy of Bloomberg

On the downside, the $26 level marked in green is the IPO spot.  TWTR briefly dipped below $30 on the day after the lockup selling, but found ample buyers there.  $30 is probably the more relevant spot in the short run, where a retest low or minor new low below there could be a nice spot to play for a bounce back into the $30-$40 range where we expect the stock to spend most of its time in the coming months (with the main risk on the downside of that range rather than the upside).

We’re not the only ones that thinks the stock most likely takes some time at this new level. The implied volatility in options has come crashing down with the stock.

Screen Shot 2014-05-21 at 11.33.06 AM
30 day IV from LiveVol Pro

Significant spikes higher in vol between now and the next earnings report will likely only come from a sharp move higher or a bad breakdown from these levels. Situations that seem unlikely compared to what just transpired in the stock.

Comparing the damage done in TWTR stock to Facebook’s decline following its IPO you see that it took a while for investors to come back to FB (over a year) until investors were confident the company could monetize some new initiatives like mobile reach:

Screen Shot 2014-05-21 at 11.38.35 AM
FB 2 year from LiveVol Pro

TWTR stock is also likely to take its time and will need to demonstrate an ability to rekindle user growth and engagement.

TWTR won’t report Q2 earnings until early or mid August, and there are no scheduled corporate events between now and then.  Obviously the company could hold some sort of media/product event, as Facebook had been in the habit of doing to introduce new bells and whistles like social graph and their mobile Home initiative.  I would guess that TWTR management, already on the ropes, may be apprehensive to follow FB’s post ipo playbook and try to make a mountain out of a molehill for new products before they are proven in beta.

If that is the case, the next couple of months is likely to leave the stock range-bound, resulting in a further retreat of options prices.  A strategy we have used in the past to take advantage of similar situations are in the money butterflies, and one could be setting up nicely in TWTR prior to Q2 results.  Once we feel that TWTR is going to to hold the prior low at $29.50, we may look to put on the following trade:

HYPOTHETICAL TRADE: TWTR($31.31) Buy July 30/35/40 Call Butterfly for $1.40

-Buy 1 July 30 Call for 3.00

-Sell 2 July 35 Calls at $.95 each (1.90 total)

-Buy 1 July 40 Call for $0.30

Break-Even on July Expiration:

Profits: btwn 31.40 and 38.60 make up to 3.60 with max gain of 3.60 at 35

Losses: btwn 30 & 31.40 lose up to 1.40, btwn 38.60 & 40 lose up to 1.40, below 30 and above 40, lose full 1.40.

RATIONALE:  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.  Stay tuned.