Tuesday, July 28, 2015

TWTR Update #5 -- (Stock Purchase)

JUL 29

IVR: 83 (pre-earnings)


Analysis 


[TWTR released earnings after hours and the stock has moved up to about 38.50.  This price is above what the first 100 shares were originally paid (36.16) and is 3pts above the existing hedge at 35.50 
TWTR then reversed on the conference call and is dropping in after hours just below 32.50]

TWTR closed today (Jul 29) at 31.20. The price has closed past the maximum protection of the butterfly hedge (32.50). The value of the hedge is 1.67.


Because of the magnitude move in the stock price, the hedge did not cover all the losses from the stock price move. Based on 102 shares, the initial cost of 36.16, we are down 4.26pts. With the hedges this still has us down more than 2.5pts.


A straight put or wider put spread would have provided more protection.


Nonetheless, I an going to close out the hedges, purchase more stock and re-hedge the position. I am also going to hedge the position only for a week looking to either capture more downside movement or protect profit.

Trades


Part 1 - Close the hedges

Close Short Call

+1/c Jul 31' 40.5 Call @ 0.01
Net Profit = 0.71 (sold 0.72, buy 0.01)

Close Butterfly Hedge

- 1/c Jul 31' 35.50
+2/c Jul 31' 32.50
- 1/c Jul 31' 29.50
Net Profit = 0.97 (sold 1.67, buy 0.70)

Total Profit = 0.71 + 0.97 = 1.68


Purchase more shares = 168 / 31.34 = 5 shares




Part 2 - Hedge

I am going hedge for 1 week and look to adjust more aggressively. I am going to start by purchasing 2 ATM puts (1 put to cover the original 100 lot of shares, and 1 put to cover the short in the money put which will most likely be converted to stock on Friday).


The stock has been volatile out of earnings and can easily move more to the downside or back up. Since earnings, IV has dropped significantly and with only 1 week of time, I am not paying much for vega or theta.


I am going to purchase the put immediately at the open and wait to sell the call. By Friday I want to have this spread off, on both put (spread or butterfly) and call side to minimize the cost. By Monday morning, I expect have back the collar structure and long 207 shares of stock.


Long Put Butterfly
+2/c Aug 7' 31 Put @ 0.695
- 4/c Aug 7' 29 Put @ 0.12
+2/c Aug 7' 27 Put @ 0.04
Net Debit: 0.495/c

Short Call
- 1/c Aug 7' 33 Call @ 0.20



Net Debit for Hedge:
0.495/c - 0.20/c /2  = 0.395/c

I am looking for the position to make the cost of the hedge 0.30 or more by the end of the week.

/END