Strategic trade
Trade view / 14 July 2016 at 12:35 GMT

A lottery ticket trade in Twitter

Trader /
United States

Shares of social media company Twitter (TWTR:NYSE) continue to look ugly through a multi-year lens. Internal struggles and a lack of fresh product initiatives to excite and grow the user base have weighed on the stock. Recently, however, some hopeful signs have emerged around Twitter, giving renewed hopes of the company becoming a potential acquisition target in the not too distant future.  

In what remains a weak global growth environment with record low interest rates, I believe that Twitter, despite its aforementioned internal struggles, is an attractive acquisition target, not just by other social media firms, but also by media or communications companies, or other large, innovative corporates. As such, this trade idea is more a lottery ticket for a potential acquisition of Twitter within the next 6-7 months than anything particularly based on charts.

From the multi-year view of Twitter's chart, we see that it's been an ugly and decisive one-way street lower ever since the 2013 highs. Many institutional investors began jumping ship in the second half of 2015, as the stock cracked below its 2014 lows. From this perspective and from the charts, there is little to like besides a lower price and, arguably, a lower hurdle of comps to beat from the fundamental side.

Twitter Inc
Source: eSignal

On the daily chart, we see that, despite the insistent downtrend, Twitter's stock has staged a meaningful 30% rally off the May lows. Along the way, the stock has overcome a few important near-term technical resistance zones and is now working on potentially pushing higher still and further improving the intermediate-term look and feel of its chart. Maybe some clued-in traders are making a bet similar to the one I'm looking at, which is supported of late by more bullish flow in options expiring a few months from now. 

I suspect that if and when Twitter is acquired, the purchase price will be somewhere in the low- mid $20s, which is why I am looking to purchase some out-of-the money call options in the stock.

Twitter Inc
Source: eSignal

Management and risk description

To be very clear, this  trade idea is much more a lottery ticket for a potential acquisition of Twitter within the next 6-7 months than anything based particularly on charts.


Entry: buy the January 18 strike call options for around $2.40.

Stop: if no acquisition is near or rumored by early to mid December.

Target: if/when the company gets acquired.

Time horizon: six months.

— Edited by D. Deacon

Non-independent investment research disclaimer applies. Read more


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