Don’t try to catch falling knives in Twitter!

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.

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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.

Trade Idea

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.

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