Twitter has often been dismissed as a company that should have sold out to Facebook (Nasdaq: FB) years ago, and until recently no one really wanted to own its stock.
I disagree. I believe now is the right time to buy Twitter Inc. (NYSE: TWTR) stock, and not just because it’s starting to show up on the Street’s buy lists.
Even so, as a rules-based trader, I need hard evidence that a trade will be worthwhile. And I just got it for Twitter. Let’s have a look at the catalyst that’s going to fatten our wallets while everyone else waits for the wrong signs. Then I’ll show you how to fuel your returns with an options strategy that could boost your profits to upwards of 300%.
Technical Signs Draw a “Triangle” of Profit
The Problem with Twitter
Twitter is definitely one of the most popular stocks, and its day-to-day movement can be a problem for an options strategy.
Because the volatility of Twitter’s stock means that its option premiums are way too expensive. So how do we take a position in Twitter while keeping our cost low? Easy: We offload some of our risk to some other guy.
That is, we will “spread” our risk with an options strategy called a call spread.
A call spread is a bit different than an outright purchase. Yes we are going to buy options, but we are also going to sell options to someone else to help finance our purchase.
Here is how it works in detail:
We are buying the January 2016 calls with a strike of $60, but look how expensive they are. At this rate, if the stock gets to $70 I only make 100% (terrible, huh?).
But, if we finance our trade by selling the same amount of 70 call options to someone else, we lower our overall cost and risk, in return for being obligated to deliver the shares to them at $70 if they desire.
Think about it… I have a right to buy Twitter shares at $60 and I could be forced to sell it at $70… I would take that deal all day long!
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Now do the math with me…
- Buy TWTR Jan 60 calls for 4.23 ($423 per contract)
- Sell TWTR Jan 70 calls for 1.94 ($194 per contract)
- Total Price Paid Out: $2.29 ($229 for the spread, plus commissions)
So the worst that could happen is Twitter shares go down, and I lose the $423 I paid for the 60 calls, but I make the $194 that I earned from selling the 70 calls.
The best case scenario is that TWTR goes up and I have to sell at $70-something, while I have a right to buy at $60. That’s a 10-point profit or $1000 per contract, minus my total investment of $229.
That’s a 336% return on investment!
Spreads like this take a bit of time to understand, but if you want to trade big movers such as Twitter like a pro, I will teach you how.