I have been long Twitter on and off over the last year from the highs beginning in the high $30s. I’ve sold in two instances, in the highs $40s and low $50s (here and here). In February I closed my long stock position as I was very surprised the stock had rallied on the Q4 results that the company had just reported. From Feb 9th:
I am a bit surprised that the stock rallied 16% on the results last week. Apart from showing their ability to make money on their existing user base, they still haven’t proven that they can expand that user base and ultimately grow into their valuation. The company is trying to make the distinction between registered users (about 290 million) and the total audience (that could be as high as 500 million) and how they hope to monetize both groups.
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The lack of user growth remains a concern. As an investor I think its great that they are jamming more ads in users streams, but as a user not so much. I suspect as they become more intrusive with their monetization that will hit the sort of speed-bumps that FB did in 2012/2013 as it relates to ad loads and privacy concerns, but I remain confident that some of the new features should increase engagement and draw users to the platform.
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With sentiment obviously a bit more favorable than the end of 2014, the stock is up 30% in 2015. I am going to close my position (long stock, short call) and look to enter a stock replacement strategy with defined risk on a pull back to the mid $40s. If anything, my disappointment with MAU growth but the better than expected revenues only increases my belief that GOOGL should buy them. But I worry that if it does not happen prior to TWTR’s Q1 report (expected in late April/early May) the stock could re-trace the recent move (as it did in Oct) if the company does not accelerate user engagement and growth immediately.
My Playbook back in February played out to a tee. I had bought some stock back prior to the results, and sold yesterday (here) and replaced with a defined risk call butterfly risking what I was willing to lose, and actually bought some stock on the close (after the results leaked and stock got slammed) just above $42, down 18%.
On Friday’s Options Action I highlighted what I called a “stock alternative” trade as a way to play for a move higher in line with the implied move, watch here:
In the end I opted for a different, but very similar structure risking $2.50. The point here is very simple, after having gains in the stock on more than one occasion over the last year (and profits in my most recent entry) I was uncomfortable with any position that did not define my risk.
This is a very important point for those who like to get trade ideas from TV or on the Web, or people that you do not pay to manage your money or for financial advice. The idea of entering a new low position in front of a potentially volatile event and replacing existing exposure with defined risk are two very different things, and on Friday’s show (and Monday’s Fast Money here) and yesterday in my trade post I went to great lengths to get this point across:
I like the idea of defining my risk into the event. I’ve been riding the stock higher on and off for some time and I still think the stock should work higher as the company is able to increase their user engagement/base and increasingly monetize that base. Prior to Q4 results I bought the stock in the high $30s and rode it up to the high $40s. Now with the stock just above $50 I think the risk/reward feels fairly even. My bullish view on the company has a lot to do with its scarcity value and that a large web/media property will be able to get far more leverage. But that is not what the stock is going to trade on after tonight’s results, which could disappoint high expectations.
I take this punditry stuff pretty seriously because I know there are real people with real money on the receiving end. Don’t think for a second I don’t feel the pressure of being right on my market views as much as I possibly can. First and foremost for my own profitability, but also because I recognize the fact that detailing everything I do on the web, and discussing on tv places a huge target on my back. One where I am often misunderstood, e.g. the nuance of replacing a profitable long with a defined risk alternative before a volatile event (and having that nervousness confirmed by a big down move.)
But still, there are not shortage of a-holes on the Twitter who want to remind you how dumb you are with every opportunity that presents itself.
Regular readers and CNBC viewers know that I am not a market cheerleader and rarely side with the consensus because it is the path of least resistance. I don’t believe that will do my peeps a whole heck of a lot of help. Why you ask, when the consensus has been right for years? Very simply: I am NOT your investment adviser, I don’t give advice or make recommendations. I take great pains to thoughtfully detail my thought process and why and how I may or may not express a view in the markets. I think this is helpful to others.
So in this instance my directional call in TWTR was clearly wrong. But my analysis led me to a trade structure that was far less wrong and protected past profits. And for that I feel good about my process.
Readers can learn from this trade, and understand that the use of equity options goes far beyond chasing unusual activity.
Oh and one last thing, on the earnings leak, I think it is properly emblematic of just how sloppy this company has been, at least from the outside looking in, and CEO Dick Costolo looks like an absolute buffoon. The calls for his head will become more prominent, but its clear, TWTR’s CEO Gots To GO.
Disclosure: Long TWTR 🙁