Monday, October 05, 2015

TWTR Update #24 (Upside Adjustment)

Oct 6

Analysis

TWTR had another big rally yesterday. The stock closed up +1.16 (close - open) on top of the previous Friday's rally. This was the second day of two large consecutive moves in TWTR. The company has finally named a permanent CEO and will return the reins back to its founder.

TWTR closed yesterday at 28.15

With the stock on the move again, I will need to place another order to hedge this upward move. As we have not had to deal with positive stock movement in awhile, here are the rules I want to follow:

1) Hedge the stock price move by spending no more than 25% of the upward move in price. It does not make sense to hedge a 1pt move by spending 1pt to place the hedge. How will you make any money if you spend all the gain on the cost of a hedge?

On a 1.16 move higher, I want to spend no more than net 0.30/c of that move to hedge (plus any credits I can obtain by selling out the existing hedges)

2) If volatility remains high, I need to use spreads to hedge. Put spreads react better to moves, butterflys work well if the volatility is high but take time to open up and is best if a stock tends to be stuck in a range. Overall a spread will allow the hedge to be placed closer to the new stock price.

TWTR looks to be bullish now and volatility is high and dropping. I anticipate the price to keep moving upwards. I will place a 2pt wide butterfly hedge to the downside with the short call just OTM.

I will place these trades in three parts with a total such that the net cost to adjust the new hedge is about 0.00/c

Trades - entered before market open

Part 1 - Roll up the call and out in time
+2c Oct 23' 27 Call @ 1.92
-2c Oct 30' 28.5 Call @ 1.96
Net Credit: 0.04/c

Part 2 - Sell existing put spread 
-2c Oct 23' 26.5 Put @ 0.60
+2c Oct 23' 25.5 Put @ 0.37
Net credit: 0.23/c

Part 3 - Purchase new butterfly hedge 2pts wide. The 2pt wide put spread would cost 0.93, so the difference using the butterfly hedge is significant.

+2c Oct 30' 28 Put @ 2.13
-4c Oct 30' 26 Put @ 1.20
+2c Oct 30' 24 Put @ 0.63
Net debit: 0.36/c

Total of all adjustments 0.09/c

-End