Shares of Momo, a Chinese social networking platform, are on fire. The stock has soared 70 percent this year, far outpacing its U.S.-based counterparts Facebook and Twitter, up 4 and 33 percent, respectively, in the same time period. One technical trader is betting on more gains when the company reports earnings later this month.
Examining a chart of Momo, showing the stock’s hefty year-to-date gains despite trading off its all-time high in June, Gordon identified technical resistance around $40 per share that’s turned into a level of support.
He pointed out that the stock’s implied volatility has started rising, a typical pattern around earnings events.
“Then, inevitably what happens, post-earnings, you get the implied volatility crush. We can use that to our advantage. We think implied volatility, the level of option pricing, the puts and calls, is elevated,” Gordon said. He added that this, combined with a bullish price chart, creates a nice set-up ahead of earnings.
To express his bullish thesis on Momo heading into earnings, Gordon is choosing to utilize a bull put spread, rather than buy calls, which he calls “extremely pricey.” Therefore, he wants to sell the Aug. 24 weekly 43-strike put, and buy the Aug. 24 weekly $41-strike put, taking in a $1 credit.
“What happens with this trade, is if it rallies post-earnings, that’s great; we will keep most or all of that profit. If we go sideways, the implied volatility crush is going to hurt those $43 puts that were short much more than the $41 puts that were long. That creates a profit for us,” Gordon said.
Momo shares rallied a little more than 1 percent on Thursday.
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