Here’s How You Trade Twitter (TWTR)

| February 7, 2014 | 0 Comments

twitterVery few stocks tend to be as divisive as Twitter (TWTR).  People either seem to love or hate the ultra-popular microblogging service.

On one hand, the fundamentals don’t come anywhere close to justifying the current valuation.  On the other hand, well, people said the same thing about Facebook (FB)… and it continues to prove everyone wrong.

Here’s the thing…

TWTR haters got a big boost this week with the company’s disappointing earnings results.

Basically, user growth was significantly less than what investors were looking for.  Monthly active users reached 241 million this past quarter.  That’s up 30% from last year’s fourth quarter.  However, the 30% growth is less than the third quarter’s year-over-year growth of 39%.

What’s more, usage data was also worse than expected.  Fourth quarter timeline views clocked in at 148 billion.  That’s a drop from the previous quarter’s 159 billion views.

For a company completely reliant on users clicking ads, slower growth and activity sends a very negative signal to advertisers.  TWTR’s selling points are its large user base and robust user activity – if either of those becomes less impressive to investors… well, let’s just say the stock was down 24% after earnings came out.

That being said, investors seemed to shrug off the positive news.  TWTR’s revenues were actually much higher than projected.

Q4 revenues came in at $243 million, up substantially from $112 million a year ago.  More importantly, revenues were significantly higher than $218 average estimate from analysts. 

Moreover, 75% of sales came from mobile ads.  That’s an extremely important metric given the amount of time people spend on their mobile devices these days. 

Finally, the company’s revenues guidance was also quite a bit over expectations.  The forecast is for $230 to $240 million for the current quarter compared to $215 million projected by analysts.

Nevertheless, it’s clear what investors care about right now… user engagement.  Unless TWTR improves its user growth and timeline views, revenues won’t mean much moving forward

So how do you trade options on a stock like TWTR?

One of the properties of a divisive stock like TWTR is its ability to move in gaps.  In other words, when everyone either loves or hates the company, it often results in big moves.

At TWTR’s current price of $53 per share, I think the March $52.50 straddle is a bit expensive at around $7.50.  However, it’s not an unreasonable price either.  You have to ask yourself if TWTR will be above $60 or below $45 at some point within 43 days from now.

I tend think that’s a likely scenario.  As such, for those willing to risk a somewhat higher premium, I believe this trade is going to pay off.

Editor’s Note:  I’m really excited about the launch of my latest service this week, the Advanced Options Adviser.  I’ve been bugging my managing editor for months now about this product – it’s something I’ve wanted to do for a long time.  Every other Monday, subscribers will get a new theme to trade on (high market volatility, rising gold prices, colder than expected weather, etc.).  Each theme will come with approximately three trades to execute, so there will be plenty of action.  My very first trade comes out Monday, so go ahead and click this link for a closer look.

Yours in Profit,

Gordon Lewis

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Category: Breaking News

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.