Anatomy of a Trade – $TWTR Call Spread Risk Reversal

by CC April 8, 2015 2:45 pm • Education

Twitter stock has broken above resistance in the past few trading days amidst rumors and what feels like a bit of a sentiment shift recently:

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TWTR since IPO from LiveVol Pro

$56 looks like the next significant spot in the stock as it was where it failed last Fall. We are long TWTR stock from lower and last week highlighted (read here) a way to add leverage to those shares, that also works as a decent stock alternative using May options:

Hypothetical Trade: TWTR ($50.25) Sell May 45 Put to Buy May 52.50 / 57.50 Call Spread for Even Money

-Sell to open 1 May 45 put at 1.35

-Buy to open 1 May 52.50 call for 2.60

-Sell to open 1 May 57.50 call at 1.25

The stock is now up a little more than 2 dollars from that spot at 52.45. That trade is now worth about .90. That profit vs the move makes sense as it’s about 37 deltas here and the call spread remains out of the money.

The biggest factor for this trade is that earnings fall on 4/29, so that short put is in play with unlimited risk below. As far as managing that I’d actually look to either close that or turn it into a narrow short put spread at some point. Right now those puts could be closed at around .95, which probably isn’t worth it yet as they were sold at 1.35. But a little higher in the stock it may be worth it to close those for .75 or so. And possibly even better than that, the 44 puts are already .75. If you bought those your only risk in this trade would be about .40 on the entire package. With a possible payout of $5 if the stock is above 57.50 on May expiration. Not a bad risk reward into earnings!