Technical Indicators Nailed YY Stock's Big Price Move

Short-term options premiums were relatively cheap at the time of the trade

by Karee Venema

Published on Jan 24, 2019 at 1:30 PM

Subscribers to Schaeffer's Weekly Volatility Trader doubled their money with the YY Inc (NASDAQ:YY) January 2019 64-strike straddle. Here's a quick look at why we expected an outsized move from the Chinese social media stock, and how the profitable options trade unfolded.

A straddle is an attractive options strategy to play when a stock is expected to make a fast and aggressive move, regardless of direction. At the time of our recommendation on Friday, Jan. 4, YY's Bollinger Band width was back near an extreme low, meaning the shares were possibly ready to enter a period of volatility expansion.

Additionally, YY had formed a descending triangle pattern, suggesting the stock could be setting up for a big price move. Plus, the equity was trading near key resistance at its 50-day moving average, and a break from here could potentially result in an outsized price move.

It was also encouraging that short-term options were pricing in relatively low volatility expectations at the moment, especially considering a straddle requires buying double premium (a call and a put). This was per YY's Schaeffer's Volatility Index (SVI) of 55%, which registered in the 30th annual percentile.

In the wake of our recommendation, YY stock broke out to the upside of its 50-day trendline, and strung together a five-day win streak between Jan. 4 and Jan. 10. While the catalyst isn't clear, the shares rallied hard during January expiration week, too, surging more than 8%. This allowed us to close out of the straddle on Jan. 18, locking in a gain of 103%.

yy stock daily price chart jan 24

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