The big correction of August 24, 2015 (flash crash?) indiscriminately plunged stocks across the board. Twitter (TWTR) went as low as $21.01 before bouncing back and closing at $26.23. TWTR has steadily climbed along with the rest of the wobbly, recovering stock market. The lowest CLOSE for TWTR during this period, and its all-time low, is $24.38.

 

Twitter (TWTR) has suffered mightily after a brief spate of optimism prior to April earnings

Source: FreeStockCharts.com

For reference, TWTR priced 70 million shares at $26 per share for its IPO on November 7, 2013. The stock opened for trading at $45.10.

 

Twitter’s glory the night before its big IPO

Source: Forbes

So, if you have been patient all this time, you can finally grab Twitter for around its IPO price. However, perhaps you really wanted the kind of discount (and buffer) that the all-time intraday low of $21.01 offered. It is still possible to get the discount by selling put options. At current options pricing, you can effectively buy TWTR for less than $20.

Put options provide the buyer the right, but not the obligation, to sell a stock at a given price called the strike price. The seller of the put option is on the hook for that right. That is, the put-seller has the OBLIGATION to buy the stock at the strike price if the put buyer decides to exercise the right. Options also have expiration dates, so the buyer’s decision to exercise or sell outright must occur before that expiration date. A seller may also chose to close out the option (buy to cover) before expiration. The closer the put gets to expiration the less valuable it becomes (aka time decay) for a given underlying stock price and “implied volatility” – good for the seller, bad for the buyer.

The put option for TWTR expiring on January 20, 2017 at the strike price of $25 sells for $540/$595 (bid/ask). Let’s split the difference and call it $565. TWTR closed Friday’s trading at $26.83 per share. If TWTR stays at the current price, the January 2017 $25 put option expires worthless. The put-seller makes money until TWTR falls below $19.35 per share (not including commissions) which equals $25 minus $5.65. This math means that for each put option the seller has potentially bought 100 TWTR shares for a net $19.35 per share. If TWTR falls below $19.35 at expiration, the put buyer will happily sell stock at $25 as s/he makes money from that point and lower. If TWTR closes on January 20, 2017 at $25 or above, the seller keeps the entire $565 premium. In between $25 and $19.35 the seller keeps a portion of the premium.

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