Short Covering Could Push Weibo Stock Higher

Weibo's chart and sentiment backdrop suggest more upside could be ahead

Jul 25, 2017 at 12:41 PM
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Chinese social media stock Weibo Corp (ADR) (NASDAQ:WB) has been nothing short of impressive on the charts, more than doubling in value over the past 12 months and boasting an 82% year-to-date lead. More recently, the shares broke out above short-term resistance at the 50-day moving average -- a trendline that seems ready to serve as support going forward.

 

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Despite this impressive action, the stock's Schaeffer's put/call open interest ratio (SOIR) -- which measures short-term open interest levels -- has been on the rise. A similar scenario earlier this year proved well-timed, with the current ratio docked at a top-heavy 1.06, in the elevated 68th annual percentile. Going forward, an unwinding of the hedges related to these bearish bets could help keep the wind at WB's back.

The stock could also benefit from a round of short covering. Short interest on WB has nearly tripled over the past year, and now accounts for a brow-raising 38.1% of the security's available float -- or roughly four days' worth of pent-up buying demand, at the average pace of trading. Weibo could strengthen its foothold atop newfound support, as short sellers start capitulating to the stock's positive momentum.

Now seems to be a prime time to enter a bullish trade on WB, too. The stock's Schaeffer's Volatility Scorecard (SVS) stands at a lofty 91, meaning it has tended to make outsized moves over the past year, relative to what the options market has priced in. Our recommended call has a leverage ratio of 5.14, and will double in value on a 19.7% rise in Weibo stock.

Subscribers to Schaeffer's Weekend Trader Series options recommendation service received this WB commentary on Sunday night, along with a detailed options trade recommendation -- including complete entry and exit parameters. Learn more about why Weekend Trader is one of our most popular options trading services.


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