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Twitter reports earnings in 2 days… I LOVE the look of this chart! The price, the volume, the relative strength, the support at short term moving averages… all really good stuff!

If you want to play this and you don’t have an existing position, the key is going to be managing risk. For me, this is where using options comes into play.

When I buy an option, I consider the full premium paid to be at risk and I like to buy a few months out so that way if the stock tanks, the option will still have plenty of time value left and the option itself won’t be worthless.

For example, right now I’m looking at Oct calls at a 21 strike price. They’re going for about 1.33 right now. If I buy 1, then my risk is $133… actually, it just triggered for me at $130. So my risk on the call is $130.

The MOST I’ve ever had a call fall on me on a stock that totally $hits the bed is 50%. So rather than losing $130, I’d probably lose about $65… not a bad way to manage risk on a trade right ahead of earnings!

But let’s say you can’t buy options and can only buy the stock. Look at where long term support is and look at what the worst post earnings performance Twitter has had. Looking back to February, it dropped about 17% in two days after reporting earnings. If Twitter drops 20% this time, we’re looking at $16/share.