Twitter’s Profit Leaves Traders with Questions
Twitter surprised Wall Street by reporting $731.6 million in revenue, beating analyst estimates of $246.4 million and also delivering a profit of $0.12 per share, reversing a loss of $0.23 a share in the same quarter a year ago.
Analysts had been expecting the company to report a fourth consecutive quarter of revenue decline and a profit of about $0.12 a share.
Some analysts noted the profit was due to Chief Executive Jack Dorsey cutting costs instead of arising from the growth of the company.
One data point that bears highlighted was the company didn’t add any net new users in the past quarter. The monthly user count remained unchanged at 330 million. However, the company reported that the number of daily active users increased by 12%.
Twitter attributed the good results to improvements in the company use of data to make the targeting of ads more individualized. The company also cited higher video ad sales and redesigned ad formats as helping to build revenue.
At least one analyst agreed. BTIG Research’s Richard Greenfield noted, “They are showing the right tweets to the right people at the right time, and as you do that, not only do you drive consumers to use Twitter more, but you attract more and more advertisers to want to be on the platform.”
But, not all analysts were impressed.
James Cakmak, an analyst for Monness, Crespi, Hardt & Co., told the New York Post that the company’s first profit is an effectively meaningless milestone.
“It means nothing toward answering the question of Twitter’s sustainability,” Cakmak said. “It’s in a situation where the turnaround is not broad-based by any means. It’s a function of one market [Japan] overseas.”
Cakmak added that Twitter’s announcement that it would not be replacing the recently departed chief operating officer, Anthony Noto — who was long considered to be the brainchild behind the microblogging site’s positive growth — is a red flag.
“Now Twitter is in a situation where there will be growing responsibility for Jack Dorsey on a day-to-day basis while his focus remains diluted between two companies,” Cakmak said.
Initially traders cheered the news.
But, the stock remains well below its highs and traders may use the rally to cut their losses. It is likely that they will at least await confirmation that the turnaround in the company is on track.
A Strategy to Benefit While Waiting for More Details
As we wait for more details on the company’s performance, we could see stocks settle into a trading range. One options strategy that benefits from a stock in a trading range is an iron condor. This strategy has the added benefit of carrying limited risk.
To open an iron condor trade, the investor sells one call while buying another call with a higher exercise price and sells one put while buying another put with a lower exercise price. Typically, the exercise prices of the calls are above the market price of the stock and the exercise prices of the put options are below the current price of the underlying stock.
In an iron condor, the difference between the exercise prices of the two call options will be equal to the difference between the exercise prices of the two put options. The final requirement for this strategy is that all of the options must have the same expiration date.
The risks and potential rewards of the strategy are shown in the following diagram.
Source: The Options Industry Council
The maximum gain on this trade is equal to the premiums received when the position is open. The maximum risk is equal to the difference in the two exercise prices less the amount of the premium received when the trade was opened.
Opening an Iron Condor in Twitter
For Twitter, the trade can be opened using the following four options contracts:
As you see, all of the options expire on the same day, Friday, March 16.
The difference in the exercise prices of the calls or puts is equal to $2.00. Since each contract covers 100 shares of stock, this means the maximum risk on the trade is equal to $200 less the premium received when the trade was opened.
Selling the options will generate $1.70 in income ($1.00 from the call and $0.70 from the put). Buying the options will cost $1.40 ($1.10 for the call and $0.30 for the put). This means opening the trade will result in a credit of $0.30, or $30 for each contract since each contract covers 100 shares.
The maximum risk on the trade is equal to the difference in strike prices ($2.00) minus the premium received ($0.30). This is equal to $1.70, or $170 since each contract covers 100 shares. Many brokers will require a margin deposit equal to the amount of risk. That means this trade may require just $170 in capital.
The maximum gain on the trade is the amount of premium received when the trade is opened. In this case, that is $0.30 or $30 per contract.
The potential reward on the trade ($30) is about 18% of the amount risked, a high potential return on investment for a trade that will be open for about one month. If a trade like this is entered every month, a small trader could quickly increase the amount of capital in their trading account.
This trade could also be closed out early to reduce the potential risks of the trade. It could still deliver its maximum gain even if the position is closed before the expiration date of the options.
The iron condor is an example of how options are a versatile tool and could meet many of your trading objectives. In this trade, options provide income and defined risk that should be lower than owning the stock.
These are the type of strategies that are explained and used in TradingTips.com’s Options Insider service. To learn more about how options can be used to meet your goals, click here for details on Options Insider.