Monday, July 27, 2015

TWTR Analysis

The online social media company Twitter Inc. (TWTR), headquartered in San Francisco, California, publishes earnings on Tuesday after the closing bell.

[TWTR in Wikipedia]


I shall use the AUG1 weekly series of options, which trades for the last time 11 days hence, on Aug. 7.


Click on chart to enlarge.
TWTR at 10:13 a.m. New York time, 30 days hourly bars
Implied volatility stands at 70.1%, which is 4.5 times the VIX, a measure of volatility of the S&P 500 index. TWTR’s volatility stands at the peak of its most recent rise.

Ranges implied by options and the chart
WeekSD1 68.2%SD2 95%ChartEarns
Implied volatility 1 and 2 standard deviations; chart support and resistance, maximum earns move

The Trade

TWTR presents the spectacle of a symbol whose maximum post-earnings movements are greater than the two standard deviation range, a sight I have rarely seen and one that will reduce the premium if I place that entire range within the zone of profit.

The best coverage I can provide on this grid is this:

Iron condor, short the $44 calls and long the $45 calls,
short the $27 puts and long the $25 puts,
sold for a credit and expiring Aug. 8.
Probability of expiring out-of-the-money


The premium is $0.22, which is 15% of the width of the position’s wings.The stock at the time of analysis was priced at $34.23.

The risk/reward ratio is 9:1.

The zone of profit in the proposed trade covers  $8,50 move either way. The biggest immediate move after each of the past four earnings announcements was $9.39, and the average was $7.37.

I could increase the premium, and thereby lower the risk, by lower the upper boundary of the profit zone. However, I judge that to be unwise because TWTR has been in a neutral trend for the past month, not a downtrend. Today's decline appears to be a market-wide phenomenon tied to a sharp market decline in China and so may be an ephemeral phenomenon. I'm reluctant to take the risk of shrinking the coverage zone.

Decision for My Account

I'm passing on TWTR because of I can't provide an adequately wide profit zone for sufficient premium. I won't be placing a trade to coincide with TWTR's earnings announcement.

-- Tim Bovee, Portland, Oregon, July 27, 2015


My volatility trading rules can be read here.


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Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decisions for his or her own account, and take responsibility for the consequences.

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