There was a saying in the pits, “Don’t try to catch a falling knife”. What does it mean?
It means we have a tendency as contrarian traders at times to buy a stock when it’s been down and dropped a bit, looking for a pullback.
This saying is suggesting to wait a bit till a stock actually settles and goes up a bit, not just one day, before we jump in. Twitter Implied Volatility has been low lately, except last 2-3 days, and it seemed an easy decision to buy cheap calls with the stock down looking for an pullback.
Nothing wrong with that thinking other than trying to wait till the stock, in this case TWTR, actually goes up for a few days and shows some life.
At this point I may scale in.
What Does That Mean?
It means I might buy 1/3 or 1/2 of my position now and if the stock drops more, I would add to the position till I get to my comfortable size.
If I have totally written TWTR off over the next year as having no upside potential, then I would avoid any long position.
With Stock at $33.65, I might wait till the stock settles and stops going down before I buy calls or a call vertical. Or I might start scaling today with 1/3 or 1/2 of my intended position.
Implied Volatility has jumped a bit over last few days with continued down moves, so I might buy vertical spreads.
An idea might be to buy the September 35-38 Call Spread for around $95 with TWTR at around $33.65. My risk is $95 and my max reward is the strike difference of 3 minus the .95 debit or $2.05 ($ 205).
I chose September versus July because TWTR doesn’t look like it really wants to go up and September gives us almost 100 days for some movement up.