Max Grigoryev
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Max Grigoryev in Fundamentality,

Twilio: Sell Volatility Ahead Of Earnings

Most of the companies have already released their earnings, some of them dropped more than 15% (FEYE), some of them jumped more than 14% (SQ), but on interesting tech stock is going to make the earnings call on Monday. I've already analyzed their financial and operating metrics, NASDAQ newcomer - Twilio. When I dipped into Twilio's prospectus and their enormous jump after IPO, I came to a conclusion that value investors should better wait till the company comes to the breakeven. It's not far away from it, but as soon as it goes profitable - the stock will soar for sure. And nobody knows exactly when it's going to happen which creates a level of uncertainty. That's why I think that options would be a great solution at this time. 

There are a few analysts covering Twilio's stock, 5 of them iterated hold recommendation, one of them is saying 'buy'. Twilio just has a revenue consensus for 2016-2017 fiscal years, no quarters breakdown. More uncertainty means higher volatility. Options traders are really active, check the options chain on marketwatch:

Take a look at the 'Open Interest" column, it shows that traders are definitely interested in volatility here. A 42 straddle will cost you around 15%, I'm pretty sure that the stock won't fluctuate that much. My suggestion is to sell a strangle: 50 call and 34 put. The initial outlay will be the following:

As you can see, you are going to get $141. The most important here is your P&L table:

As you can see, this green zone is in $33-$51 price range. It means that the stock could go up or down more than 20% each way and you will keep your premiums. Do you really think that the stock could fluctuate more than 20% in 2 weeks?