This week we are looking at another of the Investor’s Business Daily (IBD) Top 50 List companies. We use this list in one of our options portfolios to spot outperforming stocks and place option spreads that take advantage of the momentum.
Should You Buy the Twitter (TWTR) Breakout?
TWTR posted an impressive gain in April and several analysts expect it will continue to outperform. Take a look at the following two articles to see what they have to say about the stock – Why Twitter Stock Gained 21% in April and Twitter’s “Outperform” Rating Reiterated at CIBC.
A rally on the back of Twitter’s latest earnings report has resulted in a significant technical breakout as the stock managed to cross a highly respected resistance level found at $35. Essentially, the stock had consolidated in a range between roughly $27 and $35 in the prior 9 months. This technical break confirms a bullish trend, at least in the near-term. Upside resistance levels are seen near $42.50 which acted as support ahead of the July 2018 earnings report, followed by $46.75 which falls near last year’s highs.
If you agree there’s further upside ahead for TWTR, consider this trade which is a bet that the stock will continue to advance over the next six weeks, or at least not decline very much.
Buy To Open TWTR 14JUN19 37.5 Puts (TWTR190614P37.5)
Sell To Open TWTR 14JUN19 40.5 Puts (TWTR190614P40.5) for a credit of $1.00 (selling a vertical)
This price was $0.02 less than the mid-point of the option spread when TWTR was trading near $41. Unless the stock rallies quickly from here, you should be able to get close to this amount.
Your commission on this trade will only be $2.50 per spread (the rate charged by thinkorswim for Terry’s Tips’ subscribers). Each contract would then yield $97.50 and your broker would charge a $300 maintenance fee, making your investment $202.50 ($300 – $97.50). If TWTR closes at any price above $40.50 on June 14, both options would expire worthless, and your return on the spread would be 48% (449% annualized).
Changes to Investor’s Business Daily (IBD) Top 50 This Week:
We have found that the Investor’s Business Daily Top 50 List has been a reliable source of stocks that are likely to move higher in the short run. Recent additions to the list might be particularly good choices for this strategy, and deletions might be good indicators for exiting a position that you might already have on that stock.
As with all investments, you should only make option trades with money that you can truly afford to lose.