Twitter has rallied handsomely in past weeks, time to buy weekly puts
The social media giant's price has been trading at a multiple much higher than Facebook, and the latter has been doing much better in terms of revenues. We are of the opinion that the market has gotten ahead of itself in the past weeks and this company's stock is going to drop somewhat. While it may not be big, it could be enough for a trade.
This stock has been rallying since hitting lows around 29.32 in the beginning of May. Ever since, the momentum has picked up with the consensus for increasing revenues for the company in 2015. Currently the market is expecting a rise by 66% in the company's top line.
That said, its is very important to mention that if we compare the stock's price earnings to revenue growth ratio to its competitor Facebook, we will see that Twitter is close to 80% more expensive than Mark Zuckerberg's company. If we factor in the same ratio and take Google's and Facebook's numbers, the price of Twitter should be below 40$.
This is why we are favoring this opportunity to buy weekly puts on this stock. While more aggressive players can try with daily puts in the coming sessions, there are additional risks involved. With binary options prices on the stock trading today around $50.89, we identified a long term level of interest in the $50.60-70 area.
The growth rate of revenues for Twitter in 2014 is expected to come out around 104%, when compared to 56% for Facebook. Revenues of the dark blue rival Facebook have been about 8 times higher than those of the peeping bird logo company.
At current market prices we feel that the expectations for growth are largely priced in into the share price. This is why we favor this strategy. Have in mind that if we see a daily close above $60.00 we would invalidate this approach and wait for a better opportunity.