Prior to the summer, and despite what has seemed like a slow moving trainwreck since Twitter’s CEO resigned (pushed out) in early June, we had a fairly positive view of TWTR as a product, its unique position in the social /media landscape and what should be a long runway for the service and the brand. We had made a good habit since its ipo in late 2013 of buying when it was out of favor in the mid to low $30s and selling in the high $40s which worked like a charm (here & here), until last April and June (here & here). You win some, and you lose some, that’s trading. The only problem is that the TWTR story has not only changed for the worse since April, in some ways today’s news that co-founder Jack Dorsey will be the permanent CEO, while remaining the CEO of Square (which he also founded) simply makes permanent an unnecessary level of uncertainty.
Despite the stock’s 5.5% bounce today on the news, short dated options prices remain very elevated, with 30 day at the money implied vol at 71%, very near the recent 52 week highs:
For those like us who remain long the stock, are not inclined to sell, and looking to add potential yield without risk, this set up could present an opportunity.
The next identifiable catalyst will be Q3 earnings (they should fall the last week of October), and it makes sense to expect poor results on what seems to be the only metrics that investors care about (monthly active users & user engagement), as few of Dorsey’s moves as interim CEO were likely to make too much of an impact in that time period, and frankly he had little incentive to show too many quick fixes. If they guide, they will likely kitchen sink the forward outlook and set up a series of beats. Investors may look beyond this.
Elevated options prices make options sales attractive, especially against long stock.
So here is the trade to add potential yield and leverage into TWTR’s Q3 report if you are long the stock. We would like to get confirmation on an exact earnings date and see where the stock is leading into the print before committing to strikes here. But when the time comes this is the type of structure we like against long stock: [private]
Trade: Against 100 shares of TWTR at $27.80, Buy Nov 30 / 33 1×2 call spread for even money
-Buy to open 1 Nov 30 call for 1.60
-Sell to open 2 Nov 33 calls at .80 each or 1.60 total
Break-Even on Nov Expiration:
Losses: of stock below current levels
Profits: gains of stock up to $33, gains of up to $3 from the options overlay between $30 and $33. Max gain of of stock at $33 of $5.80, but stock called away there on Nov Expiration. But at that point you have added $3 in yield from the ratio call spread overlay. If the stock is $33 or higher then you have added nearly 11% in yield.
Rationale: Options prices for TWTR are high, and most longs at this point have losses. For the stock to make back some significant ground it will take some solid execution, new partnerships and some time. It is unrealistic to think that anything that the company does or says in the near term will be met with unchecked investor enthusiasm.
In the near term, $35 should serve as significant technical resistance, as that was a level a lot of investors thought was significant technical support prior to their disastrous Q2 results in late July.
[caption id="attachment_57392" align="aligncenter" width="600"]
TWTR 1yr chart from Bloomberg[/caption]