Analysis and Trade Ideas for Twitter Earnings

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Twitter ($TWTR) is the stock that everyone loves to hate. It seems a bit ironic that traders express this view while using their product, but hey, it is what it is. Part of the knock has been a detached Board of Directors, that have either never tweeted or done it once to announce they are on twitter. That seems a bit silly. I am sure GM’s Board has people that have not built or sold a car. but I digress.

The company reports earnings tonight after the close. The chart below shows the last 12 months have not been kind to the stock. From a high over $53 it fell to a low under $14 and has been left for dead. After a fall of nearly 75% you might expect some bounce. But really nothing so far. Just a flat line for 2 months.

Momentum is looking up for the stock heading into the report. The RSI is rising, but not yet over 60, so not in the bullish zone yet. The MACD is drifting higher at the zero line. And the Bollinger BandsĀ® have squeezed which is often a precursor to a big move. Perhaps tonight will be the catalyst.

Over the last 6 earnings reports the stock has moved an average of 11.58% each time. That is equivalent to a $2.10 move tomorrow, or an expected range of 15.75 to 19.95 on the stock. Short interest is high at 10%. The April 29 Expiry Straddle suggests a $2.23 move by Friday, with implied volatility at 163% well above the longer run implied volatility of about 60%.

Open interest this week is spread on the Put side from 14 to 17.5 with the highest levels at the 15.5 and 17 Strikes. on the Call side it is biggest at 20 but sizable from 17 up until that level, and all bigger than the Put side.

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Trade Idea 1: Buy the April 29 Expiry 17/16 Put Spread for 34 cents.

Trade Idea 2: Buy the April 29 Expiry 17/16 1×2 Put Spread for free.

Trade Idea 3: Buy the April 29 Expiry 18/20 Call Spread for 72 cents.

Trade Idea 4: Buy the April 29 Expiry 18.5/20/21.5 Call Butterfly for 28 cents.

Trade Idea 5: Sell the April 29 Expiry 17.5/18 Strangle for $1.96 credit.

The first trade is a straight downside trade for low cost with a possible 3;1 reward to risk ratio. The second adds leverage to the downside, and risk of being put the stock at a net price of 15 should it close under 16 Friday. The third gives the upside for defined risk and a 2.8:1 reward to risk ratio. The fourth trade, along with the third, looks for a move to the largest open interest at the 20 Strike, where the Butterfly would give a maximum profit and a 5.4:1 reward to risk ratio. The Strangle sale is profitable on a close between 15.54 and 19.96 Friday.

I like the upside Trade Idea #4 the best, but why not also do Trade Idea #2 if you are comfortable owning a beat up stock 17% below current prices.

This is the exact type of analysis given to Premium Users on earnings trades every day.

Dragonfly Capital Views Performance Through April 2016 and sign up here

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The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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