Why Contrarian Bulls Shouldn't Sleep On Weibo Corp (WB)

Fresh off an all-time high, Weibo Corp (ADR) (WB) could run higher if option bears and short sellers capitulate

by Alex Eppstein

Published on Jul 20, 2016 at 2:50 PM
Updated on Jun 24, 2020 at 10:16 AM

Chinese social media stock Weibo Corp (ADR) (NASDAQ:WB) has been a target of bearish options traders and short sellers lately. However, based on the stock's technical and sentiment backdrop, things are actually looking pretty rosy for the outperforming shares. Below, we'll take a closer look at WB's impressive chart, and explain why all of the surrounding pessimism could actually serve as a positive catalyst going forward.

Just a cursory glance at WB's chart reveals the magnitude of its outperformance. Year-to-date, the stock has soared 70%, and yesterday, it touched an all-time high of $34.21. At $33.32, the shares are closing in on the $34 level, which represents double their April 2014 initial public offering (IPO) price. While WB has toppled $34 briefly over the past two days, a decisive breakout above this area could translate into a strong layer of underfoot support.

Weekly WB Chart July 20


It seems options traders aren't buying the hype. While puts and calls have been bought to open at nearly identical rates over the last two weeks, the resultant International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) put/call volume ratio of 0.97 ranks in the bearishly skewed 85th annual percentile. True, some put buyers may be shareholders hedging their long stock positions, but an unwinding among "vanilla" bears could add fuel to WB's fire.

The prevailing put bias is echoed among short-term traders, too. Specifically, WB's Schaeffer's put/call open interest ratio (SOIR) of 0.89 outstrips all but 2% of readings from the prior year. In other words, put open interest is relatively elevated right now among options expiring in the next three months.

Even clearer skepticism can be seen among short sellers. During the last two reporting periods, short interest on WB spiked over 140%, and now accounts for almost 14% of the stock's total float. This pent-up buying power could translate into extended gains for the shares, on a short-squeeze situation.

In short, Weibo Corp's (ADR) (NASDAQ:WB) combination of strong technicals and lackluster sentiment make it an ideal contrarian play for bulls. On top of that, now's a good time for short-term options buyers to strike. The stock's Schaeffer's Volatility Index (SVI) of 50% ranks in the low 15th percentile of its annual range, suggesting volatility expectations are historically muted. More than that, WB's Schaeffer's Volatility Scorecard (SVS) of 96 indicates the stock has tended to make outsized moves in the past year, relative to what the options market has priced in.

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