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Option Bulls Pounce On Struggling SINA Corp (SINA)

Call buyers foresee SINA Corp rebounding north of the round-number $50 level

by 6/2/2014 2:11 PM
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Despite underperforming the broader S&P 500 Index (SPX) by 40 percentage points over the last three months, SINA Corp (NASDAQ:SINA) has attracted plenty of attention from option bulls of late. Specifically, the stock's 10-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) call/put volume ratio of 5.71 ranks higher than 88% of similar readings from the past year. In other words, traders have scooped up long calls, relative to long puts, at a faster-than-usual clip in recent weeks.

Things are much the same this afternoon, with calls crossing the tape at a quicker rate than puts. Digging deeper, SINA's most popular option is the June 50 call, where 6,644 contracts -- including a block of 4,803 -- have been exchanged thus far. Nearly three-quarters have traded at the ask price, and implied volatility is edging higher -- both signs of buy-to-open activity at the out-of-the-money strike.

The call buyers expect shares of the China-based online media company to rally significantly over the coming weeks. Specifically, the option bulls are aiming for the breakeven level of $50.45 (strike plus the volume-weighted average price of $0.45) at expiration, which is 14.2% above the stock's current perch at $44.18, and stands in territory not charted since late April.

If the underlying has toppled breakeven by the close on Friday, June 20 -- when front-month contracts expire -- today's speculators will profit. In fact, potential gains are theoretically unlimited north of $50.45. By contrast, if the calls expire out of the money, traders still holding onto their contracts will forfeit the initial premium paid.

As alluded to earlier, SINA Corp (NASDAQ:SINA) has been struggling on the charts for some time, pressured lower by its descending 20-day moving average. The shares are off 1.4% today, and are in the red by roughly 47% year-to-date. If this trend continues, a capitulation among option bulls -- especially those who are long at out-of-the-money strikes -- could pressure the stock even lower.

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