TWTR Covered Call Option

Twitter, the Social Media 

TWTR, the Stock

A TWTR Covered Call Option

At 36 years old, I’m part of the Facebook and Instagram generation. My friends and family use these social media sites quite frequently but I make the joke that I’m the only person I know who isn’t on Facebook.

These sites just aren’t for me. I really don’t care about my third cousin’s new haircut, or what my daughter’s school teacher had for dinner. I care about the market. And the social media site that the most sophisticated traders in the world are using these days is Twitter.

You may already know Twitter the stock—it had its IPO late last year and is currently trading under the symbol TWTR at 58. What you may not know is the growing power of Twitter in the marketplace.

Just last week, famed investor Carl Icahn used Twitter to pressure Apple into reshaping its finances. Since August, Icahn has used Twitter as a way of pushing the company to reduce its cash and to buy back stock. Here were his tweets from last week:

“Since tweeting about our large position in $AAPL on Aug 13, when the stock was 468 per share, we’ve kept buying shares of this ‘no brainer.’”

“Having purchased $500 million more $AAPL shares in the last two weeks, our investment has crossed the $3 billion mark yesterday.”

“We feel $AAPL board is doing great disservice to shareholders by not having markedly increased its buyback.”

(If you’re interested, you can follow Carl Icahn @Carl_C_Icahn.)

There are plenty more names in the world of investing and trading that you can follow on twitter. Here are just a few:

Jack Welch @jack_welch
Jim Rogers @AllJimRogers
Jim Cramer @jimcramer
T. Boone Pickens @boonepickens
Bill Gross @PIMCO

As you can see, Twitter isn’t just for the stock jockeys pumping and dumping penny stocks. It’s a growing tool that many important investing and trading players are using.

Recently, there was a study of 105 institutional investors, including pension funds, insurance companies and fund managers managing a combined total of over $3.83 trillion. The results included the finding that 82% expect the use of social media to grow in financial communications in the coming years, and that in the U.S., 40% of those polled regularly consult Twitter professionally, and another 40% consult it occasionally.

So who at Cabot would I recommend you follow on Twitter? Well of course I would recommend myself. You can follow me at @Jacob_Mintz. I use the forum to share my “Order Flow Reading” ideas. Order Flow Reading is my system of finding the biggest trades in the options world and following these hedge funds/banks/large traders into similar trades. Here’s an example of one of my tweets:

“The order flow in $FCX says downside for earnings tomorrow.”

Here are some other analysts at Cabot who I would recommend you follow and examples of some of their recent tweets:

Tim Lutts: @Timothy_Lutts

“With airline travel rebounding rapidly, Cabot Stock of the Month readers have been winning with $BA and $SAVE.”

Mike Cintolo: @MikeCintolo

“Intrigued with the calm, quiet action of late in the homebuilders, especially $TOL or $ITB. Finishing touches of huge multi-month bases?”

Tom Garrity: @Stocks4thought

“REED’S- the new world order in CSD beverages with their Kombucha offerings.”

Chloe Lutts Jensen: @chloeatcabot

“My one green spot among all the red today? Recent problem child $KORS! Guess the weak hands got out already.”

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So now that I’ve told you about the amazing information on Twitter, here’s a trade idea using options for TWTR. First off, let me be clear that I can’t speak to Twitter’s valuation or to its monetizing of advertisements.

What I can do is create some yield using options. As I mentioned above, TWTR is currently trading at 58. If I owned 100 shares or more of TWTR I could sell one call against my stock position. This is a strategy called a Covered Call.

When a trader executes a Covered Call, the trader is giving up some potential upside in the stock, to create added yield to his/her position.

For instance, let’s assume I own 1,000 shares of TWTR. This means that I can sell 10 calls against this stock position. (I can sell 1 call against every 100 shares of stock I own). So I will theoretically sell 10 of the March 65 Calls for $4.00 against my 1,000 shares.

Here’s the Profit and Loss graph of this trade:

As you can see from the graph, if TWTR is trading at 58, or unchanged, on the March expiration I will have collected my full $4,000, or a yield of 6.9% in just two months.

If TWTR closes at 65 or above on the March expiration, I will collect my entire $4,000, plus I would have made another $7,000 from my stock position, or a yield of 19% in just two months. However, I would no longer own the stock as my short calls will be exercised by the owner of the calls.

My breakeven on this trade is 54 as the depreciation on my stock position will be matched by the premium I’ve taken in by selling the calls.

I hope that I’ve shown you two things today:

1.Twitter is a revolutionary product that investors should use as a resource for trading and the market.

2.Covered calls in a stock such as TWTR can really create a tremendous amount of yield for ones portfolio.

To learn more about how Options can help to increase your portfolio returns, click here.

Your guide to successful options trading,

Jacob Mintz
Chief Analyst, Cabot Options Trader

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