The perennial disappointment that is Twitter Inc ( TWTR ) surged Friday. The 5% pop was accompanied by heavy volume suggesting its rally attempt may have staying power for a few days yet.
Whether this rebound eventually fails like all the rest remains to be seen. For now, there's an interesting trade to be had for tacticians.
First, the wounded bluebird successfully skirted its all-time lows at $14 without nosediving below support. Given how weak Twitter has been following its dismal earnings report in late-April, the successful support re-test is a definite win.
Second, Friday's pop ushered the stock back to its earnings gap area, presenting a clean entry for a gap-fill play. The price void created by the earnings drop leaves little by way of overhead resistance until $17. This elevates the odds for swift follow-through on a breakout over the $15.30 zone
Third, we're seeing a solid continuation of last week's rally in early morning trading today. The immediate follow-through to Friday's pop is a positive.
TWTR Calls Beckon
If you're willing to wager TWTR stock goes for a gap fill in the weeks ahead, buy the July $15/$17 call spread for 70 cents or better. It's a cheap little trade that packs a punch. The max loss is limited to the initial 70 cents and will be forfeited if TWTR sits below $15 at expiration.
The max gain is limited to the distance between strikes minus 70 cents, or $1.30, and will be captured if the stock can rally above $17 by expiration.
By risking 70 cents to capture $1.30, the spread offers a massive potential return of 185%.
If you think a gap fill is inevitable, buy the call spreads now. Otherwise, wait for a breakout of the $15.30 level to provide some price confirmation.
At the time of this writing Tyler Craig had no positions on any of the aforementioned securities.
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