New Trade – $TWTR: Bird Dropping

by Dan June 9, 2015 10:48 am • Commentary

I have a sort of love hate relationship with Twitter. Both the company and the stock.  I see, as many do, tremendous potential for the micro-blogging platform. But I’ve been fairly vocal about my disappointment that the company can’t seem to meaningfully grow their user base and user engagement.  The halt in growth, leads me to believe the company should be part of larger media or on-the-line property like Google (GOOG) to help achieve the scale they will need to compete for ad dollars with Facebook (FB).  I am not going to go into more detail for purposes of this post, but read earlier posts on the topic herehere, here and here.

On a few occasions in the last year I have bought TWTR in the highs $30s and sold in the high $40s/ low $50s. In late April, prior to Q1 earnings, I sold my shares and replaced with call spreads to define my risk as I thought the potential for disappointment was high. The magnitude of the sell off since the end of April suggests that some very large holders have been liquidating. And today’s decline, back to the 2015 lows and approaching key long term technical support, is worrisome.

Last week (on Twitter!) I highlighted the impending “death cross” where the 50 day moving average crosses below the 200 day. This is not a take it to the bank technical input, and its very existence may be confirmation bias, but…

And discussed on CNBC’s Fast Money on June 1st:

With few catalysts in sight, and the stock acting horribly, I am going to sell the stock that I have been averaging into since the $42 gap on April 28th, and replace it again with a defined risk options structure to give long exposure over the coming months.

New Trade: TWTR ($35.70) Buy Sept 35/45 call spread for 2.80

-Bought to open 1 Sept 35 call for 3.50

-Sold to open 1 Sept 45 call at .70

Break-Even on Sept Expiration:

Profits: above 37.80, up to 7.20 between 37.80 and 45, with max gain of 7.20 above $45

Losses: between 35 and 37.80 lose up to 2.80, with max loss of 2.80 at 35 or below

Rationale:  This trade structure is in the money and a spread, which is an attempt to offset a bit of decay as this trade is acting as a replacement for long stock and I don’t want to compound the problem with an out of the money structure that could decay to nothing if the stock goes sideways. If the stock has not moved much in the coming month prior to Q2 results expected in late July, I will likely consider rolling the short call lower in an attempt to further reduce my break-even, and thus the risk on the trade.