11:40am (EST)
As we wind down 2013, we thought we would take a quick look at the amazing run Twitter (TWTR, $74.09, up $4.13) has been on and why trading options on momentum stocks can be the most lucrative investments you will ever make.
We have been covering Twitter daily since its IPO back in mid-November with possible option trades but we have been a deer in headlights as we have been frozen by its amazing momentum.
Strangle option trades are also called chicken trades because a trader is unsure of the direction a stock will move. However, a trader may feel as though a huge move will be made so while they are sometimes called chicken trades, these trades are for the savvy investors and most Wall Street pros tell rookies to stay away from them believe it or not even though these knuckleheads have no clue how they work.
Well, we will dummy things down to show you how easy strangle option trades are to do and to not be afraid of them.
Twitter shares zoomed past $70 during Tuesday’s shortened session and have reached a peak of $73.60 today. Here was our original writeup and thoughts from the November 15th Midday Update along with an incredible strangle option trade that has played out like a fiddle (quotes are from that day).
Twitter (TWTR) Options Now Trading
12:00pm (EST)
We were looking forward to Twitter’s (TWTR, $44.20, down $0.49) recent Initial Public Offering (IPO) as a possible trade for our Weekly Wrap portfolio but we knew when the offering price kept bumping up our subscribers would get priced out. We were looking to get in for under $30.
The range moved from the mid-teens a week ahead of the offering to the mid-$20’s that week of the debut to the low $40’s ahead of the open on the first day of trading.
We aren’t sure if the volatility has created a shorting opportunity or the chance to go long because the chart is too fresh to get a good read. However, we do believe shares will be 10% higher of lower by mid-December and with Twitter options now trading let’s take a look to see if there is an opportunity to take advantage of this possible move.
A 10% move from current levels would push Twitter’s stock towards $50 or below $40. Since we are unsure on direction, we can use options to calculate if there will be a profit if one (or both) of these price targets are achieved.
There are Weekly options available on Twitter so we could use the November chains for a possible play but we want to give the trade time for the stock to make the 10% move.
The December regular options have 35 days before they expire so they would be our first choice for a possible trade.
The December 48 calls (TWTR131221C00048000, $1.40, flat) could be used as a way to play a run to $50. If the stock is at $51 by December 21 these options would be worth at least $3, or a double from current levels. If the stock is below $48 these options will expire worthless.
The December 41 puts (TWTR131221P00041000, $1.40, flat) could be used as a way to play a drop to under $40. If the stock is at $38 by December 21 these options would be worth at least $3 for a return of more than 100% from current levels. If shares are above $41 by expiration then these options would expire worthless.
If we priced both options together, the total cost would be $2.80 and if shares are above $51 or below $38 a strangle option trade would make a small profit but if shares make a stronger move to $53-$54 or $36-$35 by December 21, these options as a strangle option trade would make you 100% or more.
We won’t be taking any of these trades today but we could over the next week or two as we will add these options to our Watch list. We could take a swing at a Twitter trade using these options or another combination and if and when we do, you will be the first to know. (END)
The December options expired last Friday and Twitter shares closed at $60.01. Notice how they closed a penny above the 60 option strike price as this was the battleground going into December expiration.
The December 48 calls were worth $12 when they expired and they were profiled in real-time at $1.40. The profit on this side of the trade would have been 757%.
The December 41 puts were also at $1.40 and they obviously expired worthless. Nobody was going to “put” Twitter on you at $41 when shares closed at $60. The return on this side of the trade was (-100%).
We mentioned the total cost of the trade would have been $2.80 so let’s do some math.
If you had purchased just one option contract of each call and put, the cost would have been $280 ($140+$140). A 10 contract trade would have cost $2,800. A 5 contract trade on the calls and puts would have cost $1,400.
Option trading is about what you can afford to play with so we will cover all of them quickly.
The December 48 calls would have been worth $1,200 on 1 contract so the return on $280 would be 329%.
A 10 contract trade would have been worth $12,000 on a $2,800 investment for the same 329% return.
The $1,400 to buy 5 contracts of the aforementioned call and put options would be worth $6,000.
We cover a lot of ways to use options in our soon to be released option trading manual, How to Trade Options on Momentum Stocks. The 2014 editions are shipping mid-January as we have to wait until the final charts for 2013 are ready to add for all of the major indexes.
This part of the trading manual is crucial as we show you how we predicted Dow 16,000 back at the beginning of February and when we make our annual forecasts for the market. Nobody, and we mean nobody on the Street predicted the Dow would surge 3,000 points this year. Well, we did and we don’t work on Wall Street.
We have a ton of more secrets that will be showcased in our trading course and new videos will be coming as we prepare for the Super Bowl for earnings. 4Q results will start to pour in the second week of January and will play a major role in the market’s direction.
The bulls are keeping the train on the tracks as they rapidly approach our yearend fluff targets we have been talking about.
The Dow is up 74 points to 16,431 while the S&P 500 is higher by a 6-pack to 1,839. The Nasdaq is advancing 11 points to 4,166 and the Russell 2000 is at 1,164 – up 2 points. The S&P 500 Volatility Index ($VIX, 12.21, down 0.27).
We have updated our current trades and we have a Profit Alert for one othat is up 50%. We could have additional Profit Alerts today and/ or New Trades so stay locked-and-loaded into the close.
