Twitter Stock In Recovery Mode – Trade Ideas For The Second Week of Jan 2014

The downgrade of Twitter Stock by Macquarie Equity Research analyst Ben Schachter to a sell hit the stock hard back on December 27 and the stock plunged over 13%. On December 26, the day before the sell recommendation, Twitter Stock had reached an intraday high of $74.73. On December 27 it closed at $63.75

The following trading day the stock fell even lower to $58.57 before closing at $60.51.  Since then over a period of just 3 trading days the stock hit an intraday high of $70.43 on Friday and closed at $69.00.

Twitter Stock trades on New York under the symbol TWTR.

Short Interest

Short interest in Twitter Stock is at around 17 million shares. There are 555.2 million shares outstanding so the amount of short interest is higher than in Facebook. Facebook has 2.5 billion shares outstanding and short interest of around 31 million shares so you can see that 17 million shares short interest is significant.

Twitter Stats

The reason for the short interest lies in the stats for Twitter itself. The company has revenue of just $534.5 million. Book value is $1.32 and at present it is trading at 71.7 times price to sales. Facebook meanwhile is trading at 20.2 times price to sales but 114 times price to earnings. Both stocks are high speculative in nature although Facebook has shown its ability to grow its revenue whereas Twitter is still has to prove its worth.

Piling In

Investors are piling into Twitter as they believe it will provide the revenue that can drive the stock a lot higher. For investors interested in trading in Twitter stock the dip on December 27 and December 30 were obvious stock or option buying opportunities.

Twitter Chart

The daily Twitter Stock chart below shows the stock since its IPO. There is very little technical analysis that can be done on the stock so early in its history, but one area around $55 certainly seems to have some support. Below $55 the support falls down to around $39.00.  The interest thing about the recent sell-off in Twitter stock is that it failed to fall even below the Middle Bollinger Band let along the Lower Bollinger Band. This is a sign of strength which means selling puts could have some distinct possibilities. The problem however is selling at put strikes that have some level of safety.

twitter stock Jan 3 2014 chart

Put Selling Twitter Stock

Personally I have no interest in buying stock or option in Twitter Stock but I can see the reason for so much interest in selling puts. Over the past week I received a lot of emails from investors wondering about Put Selling Twitter but doing it safely. Whether there is much safety in a stock like Twitter is tough to predict, but by staying with out of the money put strikes and using the Middle Bollinger Band as the trading signal when to get in and out of the stock, I think an investor could probably set up a pretty good speculative trade in Twitter stock.

Trading The Twitter Stock Weeklies

Personally I would be using the weeklies for Put Selling if I was interested in the stock and I would star around the $55 put strike. For example the Jan 10 expiry put strikes below are from the close on Friday. An investor could easily put in an offer on the $55 at .35 to .40 cents and let it sit for the day. The stock has excellent volatility and enough price swings that getting a fill is possible. Even the $57 might see a fill for .50 to .60 cents which is an amazing return.

Twitter Stock weekly puts

Using the Middle Bollinger Band

A simple strategy can be devised for Twitter Stock at this point in its history since most technical indicators would not work without a lot more time to analyze. Using the Middle Bollinger Band an investor could close as soon as the stock breaks down through the Middle Bollinger Band.  For entry purposes by staying far enough out of the money with the put strikes sold and only selling when the stock is above the Middle Bollinger Band may work to help provide some security from assignment or having to buy back any naked puts for more than received when sold. Also staying just one week with the trades keeps capital at risk in the trade only for a short period of time.

Risk In Twitter Stock

Still though as was seen with the December 27 collapse, these spec stocks can fall quickly. It’s a trade-off of course. Fat rich put premiums are available, but they are fat because there is a higher level of risk.

Staying With The Weeklies

I think a case could be made for staying with the weeklies and selling puts at support around $55 to make it possibly worth the risk. The stock trades in 50 cent increments which makes rolling down and out of trouble easier but again with any spec stock if there is a significant collapse, an investor will have trouble rolling down far enough and fast enough to avoid ending up with losses or holding naked puts that are in the money.

Selling Large Quantities – Closing Early

Perhaps one of the best trade ideas might be to consider selling larger than usual put contracts and then closing them as soon as the profit is available. For example, instead of selling 5 or 10 of the Jan 10 $55 naked put for .35 cents, an investor could consider selling 30 contracts for .35 cents which would bring in $1050.00. He would then immediately put in an offer to buy to close for .20 cents which would earn $300.00. Done daily this would result in a terrific return.

Put Credit Spreads

The last trade idea is put credit spreads. For example, selling the $57 for .50 or .60 cents and then buying the $55 or $54 for .25 cents would lock in a profit and provide a reasonable level of protection. If the stock should break through the Middle Bollinger Band an investor could buy back the sold puts but hold the long puts in the hope of earning a lot more than the spread itself provided. With a stock like Twitter, anything is probably possible so if the stock plunged an investor might make an excellent return. Still though even the return of the one week put credit spread would not be bad.

Twitter Stock Trade Ideas Summary

There are a lot of ideas which can be applied to stocks like Twitter. While I don’t have any interest in selling puts myself at this point in the stock’s history, the results of Put Selling could be quite compelling to an investor who understands the risk being taken.

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