Update with Overlays: $TWTR – Flippin’ The Bird

by CC April 26, 2016 12:21 pm • Commentary• Trade Ideas

Dan had a detailed preview of Twitter’s Q1 earnings report (due after the bell). The main point is that we have a somewhat agnostic view of the stock into this report but a longer term bullish view on the stock based on the potential for product enhancements and the possibility for it as an m&a candidate:

I remain long the stock, and bullishly positioned with options, waiting for that Ah-Ha moment, which I think management gets and it’s just a matter of implementing. I am using trade structures that offer leverage, with room to the downside. Here was the most recent trade structure from late February after the stock bottomed (here).

On reason why I like the idea of ignoring near term close to the money swings in the stock to concentrate for a breakout in the future is TWTR has so many opportunities to take off, and not just with internal product tweaks. TWTR, with an enterprise value of just $10 billion, seems completely disconnected to its replacement value for a large media company. It has long been my view that Google, in particular, should buy TWTR. It would solve a few of their core businesses massive blind spots like erosion to broader search by real time search. It also adds another in app search in mobile, helps with their lack of social offerings, adds an opportunity to leverage YouTube videos (and live video) and helps with their lack of short messaging app (to name just a few!).  With founder Jack Dorsey’s return to TWTR last fall, a deal like this seems unlikely, for now. They seem committed to leveraging the existing product first. And because of that I’d expect the company to be more of an acquirer than an acquiree in the near term and deploy some of their $3.5 billion in cash.

We are currently positioned in options with that view in mind (see update below). But I wanted to look at event specific positioning for those that want to define risk into the print.  

For those that are long the stock, there are some good leverage opportunities like this:

against 100 shares of TWTR (17.50) buy the May 19/21 1×2 call spread for .06
  • Buy 1 May 19 call for .76
  • Sell 2 May 21 calls at .35

Rationale – This trade is a cheap way to add leverage to an existing position. It has the potential to add up to 1.94 (over 10%) in added gains if the stock is towards $21 on May expiration. Above 21 you are called away in the stock based on the extra short call but at an effective sale price of 22.94. This is not a hedge in any way so if the stock is down it’s the same as being long stock. The most likely scenario is losing the .06 paid with the stock below 19 on expiration, but any gains above 19 to 21 and it’s like doubling your shares with very cheap leverage.


For those looking to own TWTR shares, with this event potentially serving as the catalyst the stock needs to get up off the mat there are some ways to do that with defined risk like this:

in lieu of 100 shares of TWTR (17.60) buy the May 17/21/25 call butterfly for 1.00
  • Buy 1 May 17 call for 1.68
  • Sell 2 May 21 calls at .38 (.76 total)
  • Buy 1 May 25 call for .08

Rationale- in lieu of owning shares in TWTR into the event you can define your risk to just 1.00 (that’s less than 50% the implied move) and target a move slightly higher than the implied move to the upside. There are gains up to 3.00 possible if shares close at $21 on May expiration. There is risk to an outsized move to the upside however. Gains trail off above $21 and it can actually be a loser of a trade above $24. So this is not for people that think an epic short squeeze is possible, but simply for those that think a move to the upside in line with the implied move (or even slightly higher) is the most likely event and would like to define their risk in case the stock is own in line with its implied move (or worse).

And finally, as we mentioned, we have an existing trade in June. We now want to update that position by rolling it out to buy more time and actually bringing the call strike close to the money so that profits to the upside could kick in faster om a move higher:

UPDATE  – Sold to close the TWTR (17.60) June 15/23 risk reversal for .20 (debit, for a .20 loss)


*Bought to open the TWTR (17.60) September 15/21 risk reversal for .05
  • Sold to open 1 TWTR Sept 15 put at 1.25
  • Bought to open 1 TWTR Sept 21 call for 1.30

Breakeven on Sept expiration:

Losses: below 15.05 like long stock. Profits: above 21.05 like stock. Mark to Market: gains and losses in between those strikes int he meantime based on about +60 deltas.

Rationale – This roll seems well worth taking the .20 loss on the June collar and spending .05 on the September collar as it allows us to get an entire Summer for possible moves higher as well as lowering our long call strike by 2 dollars.