I’ve said it before and I’ll say it again — there’s good reason to “like” Momo (NASDAQ:MOMO). But if you consider yourself a bullish opportunist following an earnings beat, there’s even better reason to purchase an intermediate-term bull call spread versus owning MOMO stock today. Let me explain.
It hasn’t been easy for Momo investors in recent weeks. An ever-volatile name, shares dropped as much as 36% from their June all-time-high to last week’s low of $34.80. But Wednesday’s latest earnings confessional looks to solidify the bull case.
Momo’s second-quarter results featured double-digit growth, a top- and bottom-line beat and upside guidance. With MOMO stock up nearly 9% Wednesday the results have proved strong support off and on the price chart and suggests investors are “liking” the big picture for a company routinely described as China’s Facebook (NASDAQ:FB).
MOMO Stock Daily Price Chart
Volatility aside, MOMO stock has reaffirmed its existing uptrend dating back to early December 2017. Wednesday’s earnings-related price jump has moved shares to a four-week high while confirming a large weekly hammer candlestick as it pushed above $42.35.
The provided daily view of Momo also confirms that the reversal pattern found key technical support from MOMO stock’s original uptrend, 200-day simple moving average, 62% retracement level and a hold of the April pivot low. All told, bulls have a lot to be happy about technically. That said, the bears do have some technical ammo of their own too.
Currently MOMO stock is moderately overbought as shares challenge potential resistance from the 50-day simple moving average, Bollinger Band and 50% Fibonacci level. If traders also appreciate the lower highs in MOMO since June, a failure to clear the resistance area would look like an unfinished corrective downtrend and a good spot for bearish operators to short MOMO.
MOMO Stock Intermediate-Term Call Spread
Given the technical pickle facing traders, what’s an appropriate strategy right now? If you’re like me and favor the bull case for MOMO stock, a long call vertical spread using Momo’s options market looks like a smarter, risk-adjusted way to position.
By using a bullish call vertical the trader is able to define and reduce risk relative to other options strategies. Also important from a technical perspective, a bull call spread prevents increased risk exposure, i.e. losses on the downside in the event MOMO stock fails to move higher or worse — confirms the bear case and makes new lows.
Reviewing MOMO stock’s listed calls, one favored combination with shares at $43.96 is the Jan 2019 $50/$60 call spread priced for $2.15. Using this particular vertical keeps risk in check at a hair under 5%. For a volatile stock like MOMO, that’s nice insurance.
Additionally, this intermediate-term spread allows sufficient time for shares to confirm the uptrend and reap an attractive return of up to 365% or $7.85 if MOMO has made new highs and is trading above $60 at expiration. That’s roughly 11% from the June high and a stiff 36% from today’s share price. It’s a lot to ask for sure. But then again if history is any indicator, it’s more than a bit possible if a volatile, but “more or less” benevolent trend reaffirms itself in the days, weeks and months ahead.
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.
