For growth-minded traders, the momentum is back, both off and on the price chart, in Momo Inc (ADR) (NASDAQ:MOMO). But if you’re also hungry for value and safety, a modified fence strategy in lieu of buying MOMO stock is a bullish options combination to consider. Let me explain.
Wall Street was forced once again to scramble and chase from a flat-footed position in MOMO stock following the China-based social media outfit’s solid earnings results.
By the numbers, investors drove MOMO up by more than 15% after the company crushed analysts sales and profit estimates for Q1 and topped off the results by offering an upbeat outlook with above-views revenue growth of 51% to 55% for Q2.
MOMO Stock Weekly Price Chart
It has been a heck of a first half for MOMO stock in 2018, with shares up nearly 85%. But there’s also little reason to think the bullish run is over. Following 2017’s deep corrective move, MOMO’s uptrend this year has established a healthy cup-shaped base.
Now and with Tuesday rocketing shares out of a handle consolidation towards pattern highs, the overall constructive price action increases the odds for a breakout to new highs and reduces the chances for potential resistance and a topping pattern to emerge.
MOMO Stock Modified Fence
Back in late April I discussed a June $40 / $45 call spread in MOMO stock. The vertical has expanded from 85 cents to $3.50 with a max payout of $5, or $4.15 in profit, if shares are above $45 at expiration.
Given our increased confidence off and on the chart for MOMO stock’s prospects, I currently favor the use of a modified fence strategy. This combination purchases a call vertical and sells a put vertical in the same contract month to finance all or part of the cost of the entire position.
The money maker is for MOMO’s call spread to go fully in-the-money with shares rallying above the purchased vertical. Defensively, as this position minimizes risk relative to shares, the modified fence can work well for investors looking to accumulate MOMO stock on any potential price weakness with less exposure.
Reviewing MOMO’s options, one attractive modified fence is buying the July $45/$50 call spread and selling the July $40/$35 put spread. With MOMO stock at $44.85 the combination is trading for a debit of $1.10.
This position allows for a decent amount of time for MOMO to digest Tuesday’s move, if it’s even needed at this point, and rally firmly into and through the vertical’s $50 call to capture $3.90 in profit at July expiration.
Alternatively, if MOMO stock heads lower, this spread trader keeps his or her risk contained to $1.10 or just over 2.5% for nearly 11% and down to the $40 put strike. That’s nice insurance, right?
Possibly even more appealing to technical-oriented traders is MOMO’s recent high of $41.24 and a gap fill price of $40.02 while the position maintains very modest stock exposure. Bottom line, this strategy offers a solid positional advantage to accumulate shares at very opportunistic levels in a market sometimes imbued by mad money types.
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.
