For growth-minded traders seeking value both off and on the price chart, it’s hard to beat shares of Momo Inc (ADR) (NASDAQ:MOMO). But if you’d like to try, this strategist recommends an out-of-the-money bull call spread in MOMO stock. Let me explain.
A nearsighted Street became a bit less optically-challenged early last month following MOMO stock’s standout quarterly report. The across-the-board beat and outlook suggest there are more good things to come for the China-based social media platform. Bottom, top and even the squiggly line on the price chart, you don’t have to read between the lines to realize this bullish trend is just getting started!
But if you don’t fully trust those numbers, this strategist’s or even InvestorPlace’s Luke Lango’s bullish views that the best is yet to come for Momo shares, then place greater confidence in MOMO stock’s options market and take advantage of a spread strategy that puts bulls at a substantial risk-based advantage.
MOMO Stock Daily Price Chart
Similar to a couple months back when I laid out the case for Momo stock bulls, there have been contrasting periods of enthusiasm followed by heightened and bearish price anxiety. And much like last time, the net price action has been favorable in lifting shares higher and laying the technical framework for additional gains ahead.
Since confirming an uptrend out of a deep corrective pattern in early February shares of MOMO have continued to build upon a nice-looking uptrend with the stock up 29% from our supportive analysis and Momo’s well-received earnings beat in the first half of March helped with securing fresh highs.
Ultimately, broader market weakness took back the entire price move, but in doing so shares managed to successfully test the bullish earnings gap and 200-day simple moving average for support within a double-bottom formation. With this pattern also developing at the 50% retracement level of the prior correction, there’s very good reason to see higher prices for MOMO stock.
MOMO Stock Bull Call Spread
Considering the supportive technical work that’s been accomplished in MOMO stock and not wanting to be exposed to increased risk in the event shares falter, a bull call spread makes sense. Verticals like this are terrific as they reduce and eliminate additional downside risk as only the initial cost of the spread is sacrificed.
Reviewing the MOMO options board, one favored combination of this type is the June $40/$45 call spread. With shares at $35.76 the vertical is priced for 85 cents or less than 2.5% of the risk associated with owning shares and enjoys (hopefully) an earnings catalyst in late May to propel the stock to new highs.
If shares of Momo do improve in price, the max profit capture is $4.15 per spread if the stock is above $45 at expiration. I’d personally look to trim or adjust the vertical on a double in premium or better rather than simply holding and hoping for the best. Likewise, while limited exposure is a nice insurance policy, if support on the MOMO stock chart fails, exiting for a more modest loss if possible makes sense to this strategist.
Investment accounts under Christopher Tyler’s management currently own positions in MOMO stock and its derivatives. 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 and StockTwits.
