Analysis and Trade Ideas for Twitter Earnings – Unlocked

• Posted by Greg Harmon
• on July 28th, 2015

This analysis and the trade ideas were given to subscribers at 1pm today.

Twitter, $TWTR, has become an essential part of my life, despite not even knowing about it 6 years ago before I joined. It has quickly become the fastest source for news and is now my only source. Tonight the company will report earnings after the market close. And it goes into the report with a mixed up and confused view of who is in charge and for how long plus what are their plans? The crowd sourced estimate in Estimize shows an expected 6 cents per share and revenues of $489 million, both above what Wall Street analysts predict.

I am more interested in what the price and market action are telling about the stock in the short term though. The price went trough a rounding action and moved higher in February. it continued to push up until the management antics in April dropped the stock. But since then the price action has been very tight around 35 and sideways for 3 months.

The momentum indicators are showing some signs of reversing higher, but that is not showing up in the stock as yet. The RSI is trending higher in steps, while the MACD has been rising since mid May. A look at the Bollinger Bands® shows them tight as well. This is often a precursor to a move but they have been tight for 2 months.

There is support from prior price history at 34 followed by 30 and then only the IPO price at 26. There is resistance above is at 36.50 and 38 followed by 40.25 and 42.60 before 45.50. There is also a bullish Butterfly harmonic pattern. But that has a Potential Reversal Zone below at 22.20 first, just short of a Measured Move lower. The average move following the last 6 earnings reports has been 16.93% or about $6.00 at current price levels. The stock also has moderate short interest at 4.7%.

Looking at the July 31 Expiry options chain, with 4 days until Expiry, shows the at-the-money Straddle pricing a $4.70 move following the report, a bit smaller than the historical. The implied volatility is high at 168% compared to the August options at 72%, so premiums for tomorrow are inflated and will fall after the report. Open interest is larger on the Call side by 70% and focused on the 35 through 40 Call Strikes, but sizable from 30 to 36 on the Put side this week.

Twitter, $TWTR

Trade Idea 1: Buy the July 31 Expiry 34/31.5 1×2 Put Spread for free.

Trade Idea 2: Buy the July 31 Expiry 37.5/40 1×2 Call Spread for free.

Trade Idea 3: Buy the July 31 Expiry/August 40 Call Calendar for $0.40.

Trade Idea 4: Buy the July 31 Expiry/August 40 Call Calendar and sell the July 31 Expiry 30 Put for free.

Trade Idea 5: Sell the July 31 Expiry 30/40 Strangle for a $1.10 credit.

#1 looks for a pullback but not below 31 this week. #2 looks for a move higher to be capped by the large open interest at 40. #3 works for the longer term upside looking for 40 to stall the price this week. #4, a Call Calendar Risk Reversal, adds leverage to #3 with a possible entry at 30. #5 is profitable on a close between 28.90 and 41.10 Friday. I like #1 paired with #2 for the short term or #5. #4 is best for a longer term trade.

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