A Skew Play in TWTR

[Steven Place]

This is a risky play. It’s “naked” upside which means there is unlimited risk. However the margin of safety is very wide which means it is a high odds play.

So here’s what is up in TWTR– it’s ramping higher, hitting all time highs every single day. And the speculators are all over the place. In fact, the speculation is so hot that we are seeing upside skew in the options.

 

We’ve seen this with momentum names before (think FB) and it often indicates that the perception of upside risk is wayyyy too high.

Here’s the trade I like

Buy 1 TWTR Jan 85 Call

Sell -2 TWTR Jan 95 Call

Credit: 2.75 or higher.

Essentially, the trade will be profitable if TWTR stays under 108 by January expiration. I think it will.

The problem is if TWTR continues to rally, there will be harsh unrealized losses. However, as the skew comes down and the options get closer to ATM, the losses will be mitigated by vega risk.

If you’re not comfortable with this trade, that’s fine. You could also look at selling some bear call spreads in Jan as well. But this is what I will be playing.

 

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