Trade Update – $TWTR: Taking Profits on Half Long Stock Position

by Dan September 10, 2014 10:16 am • Commentary

Prior to TWTR’s Q2 earnings in late July I considered a couple different bullish trades using options but ultimately just bought the stock at $38.65 for the simple reason at the time (read full post below):

I think Twitter is a very unique web property, and its current $23 billion market cap does NOT reflect its scarcity value.

At this point the stock is up 36%, in less than two months, and frankly despite fantastic momentum, and little overhead technical resistance until $60, it appears that the near term sentiment has gotten fairly bullish (upgrade this morning from UBS to a buy, but no shortage of longs coming into the story in the last couple weeks.

Given the dramatic sentiment change in such a short period of time, I want to take profits on a portion of my position, as I would be a buyer again in the mid to low $40s as a portion of this position I intend to hold for a while.  My view on the company’s outlook has not changed one bit, just feel it would be piggish to not properly weigh the near term risk reward at current levels after such a large move.

Action: Sell to Close Half Position of TWTR Shares at $52.50 for a $13.85 or 36%  gain



Previous Post July 29th, 2014:  New Investment & Trade Alternatives – $TWTR: Bird Watching

Yesterday we previewed TWTR’s Q2 Earnings in yesterday’s post.  Here was our conclusion:

The one worry we would have at current levels is that the company’s recent addition and changes to senior management and the intro of new metrics to explain engagement and user growth (or lack thereof) makes us wonder if management could kitchen sink forward guidance in order to set up for a series of beats afterwards.

After exiting our prior bullish bets on the stock we are now fairly neutral with the stock up here and we think it would take an outlier qtr/guidance higher or lower for the stock to outperform the one day implied earnings move of almost $4.5.

With that overall view in mind, we wanted to put out our favorite structures in each direction for those that have an opinion into the print that differs from ours, followed by the way we’re playing it. First, 3 different structures depending on direction or no direction at all:

For those looking to play for disappointment 

Hypothetical Bearish Trade: 

Buy the Aug1 40/35/30 put fly for 1.70

Break-Even on Expiration:

Profits between 38.30 and 31.70 with max gain of 3.30 at $35


Or, for those who think TWTR goes higher from here 

Hypothetical Bullish Trade: 

Buy the Nov 45/55 call spread for 1.70

Break-Even on Expiration: 

Losses of up to 1.70 below 46.70, gains of up to 8.30 above that with max gain of 8.30 at or above 55 on November expiration.


And for those who simply want a short volatility bet on TWTR rather than a directional trade, this structure looks reasonable:

Hypothetical Short Premium trade: 

Buy the Aug1 33.5/38.5/43.5 call fly for 1.50

Break-Even on Expiration:

Gains of up to 3.50 between 35 and 42 with max gain of 3.50 at 38.50


How Dan is playing it:

I am buying stock in TWTR, not as a trade, but more as an investment with a time horizon looking out at  least until the company report’s their Q3 in late October.  I am also initiating a half position as I will look to add on weakness if it exists after the Q2 results.

I have NO IDEA what the results will be like tonight, and given the management changes, expectations for continued disappointment with engagement and view growth I would not be surprised to see fast money that entered the stock in the last couple months possibly take profits on anything less than stellar.

But here is the thing, I think Twitter is a very unique web property, and its current $23 billion market cap does NOT reflect its scarcity value.  What do I mean by this?  Well, the $19 billion price tag Facebook paid for WhatsApp is exhibit A, most large internet companies have a some obvious holes when it comes to social media, like Google, MSFT & Yahoo. What Twitter is really good at is real time search, and Google who is the king of web search has a realtime search problem, not to mention a fairly horrible social media offering in Google Plus.  Before this bull market is over I suspect we will see a bidding war for Twitter due to its scarcity value and social relevance, NOT for what they have or have not been able to demonstrate as it relates to ad revenues, user growth or engagement, but for the potential!

So if the stock is down in line with the implied move of 11% or greater I am fully prepared to double my position as nothing they do or say tonight changes my longer term thesis, so I am going into the trade fully prepared with that possibility.

If the stock opens up in line with the implied move I will possibly look to sell and out of the money call to look to add some yield.   So this is not a trade on the earnings, it is the start of an investment.

TRADE – Buying to Open TWTR at $38.65