It took less than a month for call buyers to lock in a 181% profit
Subscribers to Schaeffer's Leverage Trader nearly tripled their money with the Momo Inc (NASDAQ:MOMO) weekly 6/8 33-strike call recommendation. We're going to take a look back to see why we were initially bullish on the Chinese social media stock, and how the options trade unfolded.
At the time of our recommendation in early May, MOMO was outperforming, and had just rallied above its 50% year-to-date level. For most of 2018, MOMO had relied on support from its 80-day moving average, while a late-April pullback created a bullish falling wedge pattern near a 38.2% retracement of its December lows to its March highs. Ahead of the company's earnings report in late May, it appeared MOMO was ripe for an upside move.
In addition to technical support, there was large put open interest at the May 35 strike, which could create an options-related floor in the event of another pullback. Plus, there was room for a round of short covering, which might also create tailwinds for the shares. At the time of our recommendation, the 6.78 million MOMO shares sold short accounted for a healthy 6% of the stock's available float.
It was also encouraging that near-term options contracts were attractively priced. This was according to MOMO's Schaeffer's Volatility Index (SVI), which was ranked in the 13th annual percentile, hinting at extremely tame volatility expectations. Furthermore, equity's Schaeffer's Volatility Scorecard (SVS) of 83 suggested the Chinese stock had consistently rewarded premium buyers over the past year, relative to what the options market had priced in.
As expected, short sellers started throwing in the towel on MOMO stock, with short interest plunging more than 32% in the following two-week reporting period. Additionally, the Chinese mobile app concern reported positive earnings and revenue, as well as strong guidance, on May 29 -- lifting the shares 15%. We closed out half of the position that day. As MOMO continued to hold near record highs, we closed the other half of the position on June 6 for a bottom-line profit of 181%.
