One type of IPO met another, less desirable kind during Tuesday’s session in HUYA Inc – ADR (NYSE:HUYA). Yet for bulls interested in buying on weakness but unsure what’s going to happen next, a bullish combined spread strategy means it’s “game on!” in HUYA stock today. Let me explain.
An IPO — or initial public offering — can be tricky business. There’s less price history on the chart and typically less coverage by analysts and the media alike. Such is the case for online-gaming outfit HUYA stock.
Additionally, smaller Chinese internet stocks like HUYA typically add another layer of difficulty in the investing process. A combination of an overseas domicile, having a business in the notoriously volatile technology space and (these days at least), a potential trade war between the USA and China make for riskier investing conditions.
Nevertheless, HUYA is an interesting proposition if we’re to believe the lonely sell-side coverage from Needham & Co. Following a recent earnings beat which sported triple-digit sales gains, the firm wrote HUYA stock is one to own as the company is the only listed, pure-play streaming game outfit available to investors, enjoys a robust content ecosystem, strong user metrics and has a scalable business model.
HUYA Stock Daily Chart
Looking at the daily chart of HUYA stock, it might be said that the recent IPO met another classic type of IPO — “investors pulling out” — on Tuesday. Whatever the motivation of Tuesday’s investors, the price action was enough to establish a heavier and above-average session of distribution. It also saw shares produce a bearish engulfing pattern just removed from HUYA’s all-time-high.
What’s next? The expectation is that Tuesday’s bearish reversal isn’t likely to be a one-off event where bulls simply shake off the technical disturbance. But trying to figure out how deep and how long a correction will actually be is tricky business, especially with an IPO.
The good news is the options market in HUYA stock can allow a favorable margin of error and/or safety for bullish investors.
HUYA Stock Bullish Combined Spread Strategy
After reviewing HUYA’s options, one clever combined spread strategy which looks attractive is selling a below-the-market July $35/$30 put spread and purchasing the July $50/$60/$70 call butterfly. With shares at $42.72 and making amends for less-than-terrific liquidity in the options, the combination is conservatively priced for even money or no cost.
Given the price of admission, this spread trader enjoys profits between $50 and $70, with a max gain of $10 if HUYA stock landed at the center $60 call strike of the moderately bullish butterfly. Timing and price, of course, make the max profit unrealistic. And truthfully, the liquidity to unwind the trade would make $10 all but impossible to capture. That being said, substantial profits upwards of $9 would still exist in that type scenario.
The one caveat or compromise is if HUYA stock rallies more than 40% over the next month. If that occurred, shares would overshoot the butterfly’s nice size but not quite wide enough profit zone and result in a scratch for this trader. I personally see that as an acceptable risk.
On the downside and with the above-market butterfly effectively subsidized by the below-market put spread, this trader has $5 of HUYA stock risk. Nevertheless, with a break-even at $35, 17% below the current share price, and the full exposure wedged nicely between the 38% to 62% retracement levels, it’s time to shout “game on, bears!”
Investment accounts under Christopher Tyler’s management do not currently own positions in any securities 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 and StockTwits.
