The momentum isn’t back just yet in Momo Inc (ADR) (NASDAQ:MOMO). Reasons for traders to pick up shares of MOMO, however, are building. And for bulls seeking a stronger blend of risk-to-reward, a bull call spread looks great in lieu of long stock. Let me explain.
Momo, Inc. may just be the Rodney Dangerfield of stocks right now. Similar to the comedic legend’s “no respect” shtick, shares have failed of late, to get any respect from investors. But that should give rise to a bullish opportunity.
Some of MOMO’s pressure isn’t entirely surprising. The small cap, and fairly recent initial public offering, is a China-based company. In broad stroke terms, that factor has trumped those other favorable characteristics courtesy of the incoming Commander and Chief’s aggressive platform on foreign trade.
The latest from the President Elect out this weekend has Trump questioning decades of trade policy with the Far East and why the U.S. should abide by a “one China” policy if the country isn’t receiving kickbacks, er “great deals,” elsewhere as a result.
Now, too, MOMO could face additional internal, political headwinds as well. Overnight, the Chinese market fell more than 2% after the country’s insurance regulator stated it curb “barbaric” or aggressive stock purchases and acquisitions by insurers, according to Reuters.
For those unfamiliar, Momo is considered the “Chinese Tinder,” or a Chinese mash-up of Snapchat, Match.com (NASDAQ:MTCH) and Facebook Inc (NASDAQ:FB). The popular social media platform also has influential backers with Alibaba Group Holding Ltd (NYSE:BABA) a stakeholder.
That’s nice to consider.
As well, an executive-led buyout bid this past April suggests insiders may have to ante up more capital if taking MOMO private is still on the table. Shares continue to trade well-above the associated bid level around $16.50.
Lastly and certainly attractive, MOMO has been displaying its best capitalistic impression by offering investors a profitable growth story. And its top and bottom lines may see even greater gains based on the Chinese phenomenon of “Wang Hong” and online product endorsements within its community. JP Morgan for one, sees MOMO as one of the big beneficiaries of the powerful trend.
MOMO Weekly Chart
Corrections like MOMO’s are normal and should be taken in stride. In fact, and as a generality, a decline of 30% is considered par for the course for growth stocks.
As MOMO’s retracement has been consolidating laterally for the past month as it tests its former highs and 38% Fibonacci support, this strategist likes the chances of it reversing higher from here.
The downside risk is that shares could always break lower despite the constructive price behavior. If the recent low of $19.50 fails, loose zone support from $15 to $17.50 should come into play.
MOMO Long Call Option Strategy
Reviewing the MOMO options board, the April $22.50/$25 bull call spread is attractive given what’s been addressed and our bullish, but cautious point of view.
Priced for 80 cents with shares of MOMO at $20.55 the vertical requires a rally of about 13% at expiration to breakeven. If a move in the desired direction happens sooner rather than later, profits will build immediately.
If MOMO stock gets above $25, traders could realize a max profit of $1.70, or near 200% return. For a growth and small-cap issue, that’s certainly within the framework of what’s possible. Bottom line, the MOMO price chart confirms this type appreciation is equally doable.
Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.
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