Examining Twitter for an Earnings Trade

Twitter started moving higher out of a flat base in November. It gapped up in February and then continued to a high in March. The pullback from there found support at the 100 day SMA after closing the gap in early April and then rode the 100 day SMA higher. At the end of May it accelerated to the upside, closing the month back at the prior high. It continued higher in June reaching the Measured Move by the middle of the month and then paused. It has been digesting these gains ever since in a bull flag. a break of the flag to the upside establishes a Measured Move to 62.

The stock price has seen an average move of 2.62% after the last 6 earnings reports. This is about $1.12, making a range of 41.50 to 43.75. The at-the-money Straddles that expire tomorrow suggest options traders expect a much bigger $5.40 move, or a range from 37.10 to 48.10. There is resistance in the chart at 45.50 and 47 then you have to go back to 2015 to find it at 49.50 and 50.75 before 52.50 and 53.50. Support lower sits at 42.30 and 39.35 before 37.15 and 34.15. Short interest is elevated at 7.5%, so there could be some fuel from short covering on a move higher.

Looking at the July 27 Expiry options open interest on the put side builds from 35 to a peak at 40 and then trails to the 45 strike. On the call side rises from 42 to a peak 3 times bigger at 45 then dips back until surpassing it by 40% at the 50 strike. With one day to got eh implied volatility is pricing out at near 300% compared to the August monthly at 78% and October at 54%. Volatility will be crushed quickly in the morning leading to quick moves toward intrinsic value at the open. Large transactions today on the weekly chain look bullish on the call side, trading at the offer.

Trade Idea 1: Buy the July 27 Expiry 42/40-38.50 1×2 Put Spread for free. This trade looks for a pullback and possible pin at the large open interest at 40 on the put side. One a blow out move to the downside you will have the possibility of being put the stock at 37.50 with a basis of 35.50, nearly a $1.50 below the June breakout level. It turns the biggest profit on a close between 38.50 and 40 tomorrow.

Trade Idea 2: Buy the July 27 Expiry 43/45 Call Spread for 85 cents. This trade looks for a move higher and possible draw to the large open interest at the 45 strike. It offers a potential 2.35:1 reward to risk ratio. If you are comfortable owning the stock at 38, the gap level from June, you can also sell the July 27 Expiry 38 Put for 86 cents, making your out of pocket cost zero.

Trade Idea 3: Buy the July 27 Expiry/August 49 Call Calendar for 60 cents. This trade looks for the full options implied move to happen to the upside and then the price to stall Friday, but continue on a bullish path afterwards. The Calendar can be sold tomorrow on a move higher as one options. The short calls can also be rolled out and up to the August Expiry to create a Call Spread as another options. The reward is potential unlimited should it close below 49 tomorrow but higher. Again if you are comfortable also owning this stock on a pullback to 37, the March high, you can sell the July 27 Expiry 37 Put to make your out of pocket cost zero.

Trade Idea 4: Sell the July 27 Expiry 37/49 Strangle for $1.20 credit. This trade presumes the options market is not under-pricing the expected move. On a close between 37 and 49 you would keep the full $1.20 credit, or 2.82% of the notional stock value, for an overnight trade. It becomes unprofitable on a close under 35.80 or above 50.20 tomorrow.

You decide which way you think the stock will move from your read of the price action, options action and open interest, or maybe even the fundamentals. And size your trade based on what level of risk you intend to take. Perhaps larger for the debit trades where you are not at risk of being put a position in the stock and smaller where owning the stock at a lower is the goal on a pullback. Analysis and trades like these are presented everyday in the premium subscription product. Give it a try.