Ever seen a stock go down 10% in a day? If you were watching Twitter (NYSE: TWTR) on July 9, you would have had the opportunity. The social media company announced that they purged 70 million fake accounts, and with 336 million monthly active users, that’s a pretty sizeable egg they just kicked out of the nest.
Twitter avoided being battered and fried and managed to close the day down 5.38%. Because of this outsized move, Twitter’s implied volatility rank rose to 67% for the August cycle which includes the earnings announcement on July 27, 2018. With implied volatility rank at 67%, two-thirds of the time options prices are lower than they are right now. They’ll likely be elevated until earnings, especially with a large number of the blue bird’s accounts taking flight.
Maybe you think the worst is yet to come for Twitter. The social media giant just started with bad news and you’re ready to profit by going short. By selling the August 49 call and buying the 50 call, you would be making a trade that has a 66% probability of profit — shown by the 49 call’s 34 delta value and has a breakeven price of $49.25. That’s 11% away from the current price of $44.14. This trade only risks $75 to make $25, or a 33.3% return on capital.
Or maybe you think that Twitter has gained its wings and is ready to fly away, lifting the price of the stock with it. You could sell an August 41 put and buy a 40 put. This trade has a 69% probability of profit, as shown by the 41 put’s 31 delta value, and the breakeven is at $40.65, that’s 8% below the current stock price. This trade also has a high return of $35 on $65 of capital risked, or potentially as much as 53.8%. There are very few places you’ll be able to find those kinds of returns in only 38 days.
Or you could sell both the put and call spread and build the greatest trading bird of all time, the Iron Condor. By selling both, you’re taking in a credit of $60 which is the max profit on the trade, but the risk is only $40. Yes that’s right, less than what you spent to buy your family four buckets of fried twitter, I mean chicken. Now because we are boxing in the trade on both sides, we need to add the deltas together to get the combined probability of profit. So the 34 delta call and the 31 delta put combine for a total of 65. With only a 35% probability of profit (100-65 deltas), this does not qualify this trade as high probability. However, should Twitter stay in a small range, the risk to reward is over 150%.
This article may not fit within Twitter’s 280 character limit, but it should give you at least 280 different, or maybe just three, ideas about how to trade the stock with options over the next few weeks.
Christopher M. Uhl, CMA, MOSM
10minutestocktrader.com
Email: chris@10minutestocktrader.com
Twitter: @10minutetrading
Instagram: @10minutetrading