New Trade Alert for (TWITTER)
TWITTER – BUY TWTR March $16 Call @$5.00 or less
Risk Rating: 3.75 (1 = lowest 5 = highest)
Above Break Even Probability: 40%
Max Loss Probability: 29%
Little TWITTER Bird CAN Make Noise
Election uncertainty is behind us with a positive reaction in stocks that had trapped trade sideways for many months.
A solid financial foundation has been built for the next president as the heavy lifting has been done to get the economy and markets on track to take off.
The list of positive fundamentals is long…
Unemployment is at 5%, corporate profits are at records and growing again, gas is at $2 per gallon, GDP is at 3%, housing has come back, auto sales posted records, the stock market is 200% off the crisis lows, inflation in non-existent, interest rates remain near all time lows, income rose the most in a decade last year, and companies have Trillions of dollars in cash on the balance sheet.
It is nearly impossible to NOT be optimistic of the opportunities ahead.
With rates on the rise and the “Free Money” climate coming to a possible conclusion, DEALS ARE GOING TO GET DONE. October was a record for corporate mergers and acquisitions as buying growth is a strategy for stocks.
Twitter technology played a HUGE part in this presidential cycle as a direct medium for communication changing the role of reporters in this campaign.
The stock is stuck in a range from $14 to $20 since January 1st with a false breakout when a TWTR takeover deal looked imminent. The $17 midpoint of that sideways slog is an important level of support to lean on.
The May 24th extreme just below $14 saw bullish divergence with a new low but not a new high in volatility.
A TWTR breakout above the $20 top targets $26 which stands 33% up above. That $26 objective also coincidentally is the IPO price when the stock was launched just a few short years ago.
A stock substitution strategy using options ties up less capital and has absolutely limited risk to the premium paid. An option instead of buying the shares also has greater staying power for long term trend development.
The March option has four months for Bullish development.
An In-The-Money option gives you the right to be long the shares from a lower strike price and costs much less than the stock itself.
The Options Way: Unlimited Upside Potential with Limited Risk.
A Twitter long call option can provide the staying power for a potential bullish bounce. More importantly, the maximum risk is the premium paid.
One major advantage of using long options instead of buying or selling shares is putting up much less money to control 100 shares — that’s the power of leverage.
Choosing an option can sometimes be a daunting task with all of the choices and expiration months. Simply put, traders want to buy a high probability option that has enough time to be right.
The option strike price is the level at which you have the right to buy without any obligation to do so. In reality, you rarely convert the option into shares. Simply sell the option you bought to exit the trade for gain or loss.
There are two rules options traders need to follow to be successful.
Rule One: Choose an option with 70%-plus probability. The Delta is a measurement of how well the option reacts to movement in the underlying security. It is also important to buy options that payoff from only a modest price move.
There is no need to ONLY make money on the all but infrequent long shot price explosions.
Good Options can profit from only modest directional moves.
Any trade has a fifty/fifty chance of success. Buying options ITM options increase that probability. That Delta also approximates the odds that the option will be In The Money at expiration.
Buying better options are more expensive, but they are worth it — the chances of success are mathematically superior to buying cheap, long shot Out Of The Money lottery tickets that rarely ever pay off.
With TWTR trading at $19.50, for example, an In The Money $16.00 strike option currently has $3.50 in real or intrinsic value. The remainder of any premium is the time value of the option.
Rule Two: Buy more time until expiration than you may need – even if the move occurs in the next few weeks. Time is an investor’s greatest asset when you have completely limited the exposure risks.
Traders often buy too little time for the trade to develop. Nothing is more frustrating than being right but only after the option has expired premature to the market move.
Trade Setup: I recommend the TWTR March $16.00 Call at $4.75 or less. A close in the stock below $15 on a weekly basis or the loss of half of the option premium would trigger an exit.
An option play also has staying power with the ability to ride through Ups and Downs that would force most stock traders out of the position.
The option also behaves much like the underlying stock with a much less money tied up in the investment. The option Delta is 76%.
The March option has four months for bullish development.
The maximum loss is limited to the $475 or less paid per option contract. A stop loss is placed at half of the premium paid to lessen dollar exposure.
The upside, on the other hand, is unlimited.
The TWTR option trade break even is $20.75 or less at expiration ($16.00 strike plus $4.75 or less option premium). That is just little more than a dollar above the current price.
If shares move the $26 measured move target , the option would be worth $10+ for more than a 100% return on investment.