Earn 12% In A Month On This Twitter Covered Call

| December 17, 2018 | 0 Comments

TWTRTwitter (NYSE: TWTR) is one of those companies which often poses a conundrum to investors. On one hand, the microblogging site has become an essential tool for following breaking news and insights into everything from sports to finance to politics. On the other hand, despite the popularity, the company doesn’t have an obvious path to ramp up monetization of its user base.

Regarding the issue of monetization, the company primarily makes its money on ad revenues. However, Twitter ads get mixed reviews as far as effectiveness. And frankly, the company doesn’t have many alternatives for generating revenues outside of ads. Selling/licensing customer data (trends, etc.) is certainly a big growth area, but it has a ways to go to make a real impact on revenues.

On the bright side, Twitter is pretty much a must-have product for anyone who utilizes social networking. Active Twitter users include the President of the US, just about every famous athlete and entertainer, and a multitude of industry experts. For concise and/or breaking news, there’s simply no better source available.

It’s easy to see why investors are bullish on the stock. Yet, it’s equally logical to see the argument from those who may be skeptical on future growth potential. Look no further than Facebook (NASDAQ: FB) to see the potential perils of a public social media company. (Of course, TWTR has its own challenges with how it handles First Amendment issues.)

So how do you trade TWTR if you’re bullish on the stock but are concerned about downside risk?

As I matter of fact, I recently came across an interesting covered call trade in TWTR which provides a nice balance between risk and return. The beauty of covered calls is they can provide a hedge, income, and growth potential all in one trade.

This particular covered call involves selling 2,000 of the January 18th 40 call versus stock at $36.73. In other words, the trader purchased 200,000 shares of TWTR while simultaneously selling the 40 calls 2,000 times. The calls were sold for $1.10 meaning the trader collects $220,000 in premium.

First off, the $1.10 in premium collected also serves a hedge for the long stock. It protects the trader down to $35.63. Moreover, that premium represents a 3% yield on the trade, which expires in just over a month. That represent almost a 36% annualized yield.

In addition, since the trader is selling out-of-the-money calls (at the 40 strike), there is also stock appreciation potential. An additional $3.27 can be earned if the stock goes to $40 or higher by expiration. That’s represent another 9% in gains. All told, if TWTR has a good month, this trade can make as much as 12%. (In dollar terms, the trade can make about $875,000 at max gain.)


If you’re bullish on TWTR but worried about overall market conditions or company specific bad news, this is exactly the sort of trade you want to be making. You earn the 3% yield no matter what. The trade also provides a limited hedge on the stock price if the market sells off. And, you still have an additional 9% upside potential in stock appreciation.

It’s hard to argue with a relatively safe trade that can also produce 12% gains in about a month. If this trade appeals to you, I believe it’s a nice addition to any income-producing portfolio.


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Category: Options Trading Strategy

About the Author ()

Jay Soloff is an options analyst with Investors Alley.

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