Buy TWTR Calls on Positive Sentiment

Twitter Inc. (NYSE:TWTR) is hot in the news today after the unexpected exit of CEO Dick Costolo. Yesterday, Costolo revealed that he would be leaving Twitter starting from July 1. Now, Jack Dorey would be taking over as the CEO on an interim basis on until a more permanent arrangement is done.

Twitter with its market capitalization of $23.47 billion is a global platform for public self-expression and conversation in real time. Twitter is a real-time platform; where any user can create a Tweet and any user can follow other users. Viewers can see photos, videos and conversations directly in Tweets to get the whole story at a glance, and all in one place.

I have written extensively about trading Twitter options in the last one year. In the last piece, I talked about how Twitter’s relevance might be the new path to profitability. In that piece, I gave the stock a $50 price target, but the stock has not risen up to expectations.

Twitter Won’t Jump on the News

Twitter has found profits elusive and its share price has not met expectations. There are indications that the stock might jump on the strength of the news. The stock already gained 4.38% to $37.40 in after-hours trading.

I also think that investors are somewhat glad that Costolo is leaving Twitter. The 4.38% gains in after-hours trading suggest that they think Twitter is worth at least $900 million more without Costolo than with him.

However, I don’t think that the news of Costolo exit is enough reasons to become optimistic about the prospects of Twitter. For one, the revelation is not really news because the issue has been raised with the board last year. Nonetheless, Twitter still has one of the “strongest management team it’s ever had”.

Twitter’s Underlying Problems Remain Intact

  • User Growth

Chief of Twitter’s problem is its ability to grow its user base. The company has not been able to grow its user base and you can’t monetize a subscriber base that you don’t have. Analysts at RBC suggests that the company will need about 100 million more users in order stabilize and rebuild itself to generate profitable ad revenue.

  • Effective Monetization Strategy

Another problem that Twitter has is its inability to monetize its user base. Twitter only generates epileptic ad revenues; yet, the biggest sensational media stories usually breakout on its platform. If Twitter were to be a conventional media house, the opportunities for monetizing its user base and breaking stories would have literarily been endless.

How to Trade TWTR Options

Twitter will not be a buy until it is able to show consistent growth in its user base, and until develops an effective strategy for monetizing its reach. Nonetheless, options traders should be able to snag up gains on the positive sentiment that currently surrounds Mr. Costolo’s exit. I recommend buying the TWTR Sep 2015 37.000 call (TWTR150918C00037000) at an asking price of $3.20.

 

 

— Daily Option Alerts

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