With a contagion of fear overtaking Wall Street, profit taking has quickly become universally popular. But indiscriminate selling pressure in China’s Momo (NASDAQ:MOMO) stock isolates shares from the pack, and puts them in stronger position for a major bottom to form. Let me explain.
It’s no laughing matter. I’m referring, of course, to the coronavirus. What was an isolated problem within China’s borders has quickly grown much larger and more damaging. The latest and right from today’s headlines has more than 4,500 people contracting the deadly disease and 80 confirmed deaths.
The outbreak has helped the iShares China Large-Cap Index (NYSEARCA:FXI) tumble more than 11% from a recent high of $45.29 to yesterday’s low of $39.81 in under two weeks. And the worst may not be over either. Scientists are now warning for each infected person, two to possibly three more people will become sick.
Still, even in an environment where stuffing some extra cash under the mattress might make sense, MOMO stock stands out as a name worthy of a healthy outcome for today’s investors.
MOMO Stock Price Daily Chart
Source: Charts by TradingView
During a period in which FXI has fallen in excess of 11%, social media platform Momo has tumbled 31%. It’s a lot to be sure. On the other hand, in a name like this, some of the aggressive selling pressure is to be expected.
The fact is MOMO stock is a mid-cap, growth company. And if Momo is able to become even slightly more like some of its bigger, more established peers, the potential for investors is massive. But it’s this same combination that lends itself to greater price volatility than a large-cap index such as FXI and constituent stocks such as insurer Ping An (OTCMKTS:PNGAY) or Alibaba (NYSE:BABA). Further and historically, Momo has done its part to solidify this relationship.
Is there good news amid terrible headlines and panic? Well, the worst may be over for MOMO stock. Investors’ aversion to this particular risk asset has allowed shares to drop into an aggressive, oversold test of a pair of key price support lines, as well as the 50% retracement level. What’s more, with Momo shares up slightly intraday and well removed from session lows, this critical challenge is proving its worth.
I see Momo stock as a buy in today’s market. Still, knowing a bearish contagion could always turn much uglier, I’d strongly suggest gaining exposure using MOMO’s options market. I’d recommend investors construct a limited and reduced-risk bull call spread or its synthetic equivalent, a collar strategy.
One position of this type which fits the bill is the March $31/$36 bull call spread. Priced for $1.35 with shares at $30.36, the construction allows for nice strike placement relative to MOMO stock and enough time to realize solid risk-adjusted profits that won’t kill the trading account in the event of a technical failure.
Investment accounts under Christopher Tyler’s management do not currently own positions in 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.