Shares of Twitter (TWTR, $40.75, down $1) have only been trading for 10 days and are pushing $40 following an IPO pop to $50 on its first day of trading.
It is too early to use technical analysis when trying to figure out where shares could be headed because the chart is so fresh but the “big” money is hoping shares fall to $35. This is where the suit-and-ties are expected to come in and buy the stock and would mean another 10%-15% haircut from current levels.
The options on Twitter made their debit last Friday and have only been trading for 4 sessions. We mentioned at the time when shares were just north of $44 they could push $50 or $40 over the next month and that prediction has come sooner rather than later.
We profiled a possible strangle option trade but the premiums were a little high and we didn’t want to get into them until some trading history has been established. Here were our thoughts last Friday with price quotes from that day:
“The December regular options have 35 days before they expire so they would be our first choice for a possible trade.
The December 48 calls (TWTR131221C00048000, $1.40, flat) could be used as a way to play a run to $50. If the stock is at $51 by December 21 these options would be worth at least $3, or a double from current levels. If the stock is below $48 these options will expire worthless.
The December 41 puts (TWTR131221P00041000, $1.40, flat) could be used as a way to play a drop to under $40. If the stock is at $38 by December 21 these options would be worth at least $3 for a return of more than 100% from current levels. If shares are above $41 by expiration then these options would expire worthless.
If we priced both options together, the total cost would be $2.80 and if shares are above $51 or below $38 a strangle option trade would make a small profit but if shares make a stronger move to $53-$54 or $36-$35 by December 21, these options as a strangle option trade would make you 100% or more.” (END)
The December 41 puts are now at $2 while the December 48 calls are at 40 cents. The puts are up nearly 50% while the calls are down 30%. Overall, as a strangle option trade the calls and puts would be down a little over 10%, together.
At the juncture of the trade, the ideal scenario would be for Twitter to fall below $40 this week and for the December 41 puts to clear $2.80 or better. This is when you could close out the puts and make it a “risk-free” trade as the premium you paid for both options has now been covered.
The beauty of the trade is that the December 48 calls would still be open and if there were a strong rebound the calls could come back as well. If they expire worthless, then no big deal as it was a risk-free trade once you sold the puts.
The question now is, will Twitter fall below $40 this week or next, or will $40 hold?
The market has once again traded in a tight range ahead of this afternoon’s Fed minutes but the action will likely heat up once the minutes are digested.
The Dow is up 13 points to 15,980 while the S&P 500 is advancing 3 points to 1,791. The Nasdaq is gaining 10 points and is at 3,942 as we head to press.
We have more good news for one of our current recommendations as shares are up 8% today. The jump has pushed our option return to 200%. Subscribers, check the Members Area for the updates as we also have a NEW TRADE.