Call Options Or Put Options On Twitter (TWTR)?

| May 7, 2014 | 0 Comments

TWERTwitter (TWTR) is making news for all the wrong reasons. The share price of the microblogging giant has been getting crushed since mid-March.

TWTR shares are currently trading at $30.65, down over 50% year-to-date. The stock’s down 59% from the 52-week high of $74.73 and is now 4% below the previous 52-week low of $31.72.

Is this an opportunity to buy call options on TWTR after the stock’s recent plunge? Or should you buy put options on TWTR because the company is still overvalued, even after the drop?

The bulls make a convincing argument…

Twitter may not be growing as fast as investors like, but the company did just beat top and bottom line estimates for last quarter’s earnings. How bad could a company be that’s doing better than expectations?

What’s more, TWTR still has a whopping 255 million active monthly users. That’s a massive – and engaged – audience. There’s plenty of opportunity to further monetize the impressive and dedicated user base.

Finally, the most recent bout of selling is due to the end of the 180-day lock-up period. Some investors have been waiting to take profits – which is entirely normal. The selling pressure won’t continue once the investors who want to leave have made their exit.

But the bears have a compelling case as well…

Yes, TWTR beat on earnings and revenues expectations, but the bar wasn’t very high. The most important metric is user growth. And in that area, the company’s 6% growth level was extremely disappointing to investors.

After all, TWTR is not yet profitable. If the company can’t show strong user growth, what kind of future does it have? Not to mention, even after the drop, the stock is still trading at a steep valuation.

Finally, plenty of Twitter’s early investors are jumping ship now that the lock-up period is over. That doesn’t inspire a whole lot of confidence. If those investors had faith in the company’s future, would there be this much selling going on?

So is TWTR’s recent drop a case of overselling, or does the share price has even farther to fall?

If you think the bulls are right, take a look at buying the TWTR June 21st $32 calls for around $2.00.

If you think the bears are right, take a look at buying the TWTR June 21st $30 puts for around $2.30.

Yours in Profit,

Gordon Lewis

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Category: Call Or Put Options?

About the Author ()

Gordon Lewis is the Chief Investment Strategist and editor for the popular daily newsletter – Options Trading Research. He’s also editor of our dynamic theme-based options trading service, Advanced Options Adviser, and one of the key analysts behind the highly successful Options Trading Wire.

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