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How to Capture 300% in Momo Inc (ADR) Stock

If recent history is any indicator, Momo Inc (ADR) (NASDAQ:MOMO) is readying for another big move courtesy of Tuesday’s earnings confessional. But if you’re of a mind that MOMO stock is set to find investor favor M.I.A. of late, a bull call spread is a favored combination worth consideration. Let me explain.

MOMO Stock: How to Capture 300% in Momo Inc (ADR) Stock
MOMO Stock: How to Capture 300% in Momo Inc (ADR) Stock

Chinese mobile-based social media upstart Momo Inc reports before Tuesday’s open. And if past earnings releases offer any clues as to what investors might expect, two items are likely to rhyme following MOMO stock’s Q3 announcement.

First, it’s likely not a stretch to anticipate MOMO will beat Street views. The company has been consistently topping both bottom- and top-line estimates while sporting triple-digit sales growth and fairly healthy double-digit earnings increases. And with a “game changer” live video broadcasting feature, there’s support for anticipating that trend will continue.

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Second, MOMO stock is a mover and shaker when it comes to earnings reactions. Price gaps and monster-size intraday trading ranges are the norm. I’m guessing there’s also little reason to believe that trend is in jeopardy of disappearing.

But with blemishes also apparent off and on the price chart, if you’re going to pull the trigger, being a bullish investor in MOMO stock is made a good deal easier with a long call vertical spread.

MOMO Stock Daily Price Chart  

 

Looking at the weekly chart of MOMO stock, this strategist is optimistic that a bottom is in play. As well, bullish momentum may be right around the corner spurred along by Tuesday’s earnings announcement.

Over the past few months, shares of Momo have corrected in excess of 40% after a failed cup-shape base breakout attempt to fresh, but short-lived, highs. The hard pullback for all intents and purposes tested the 50% retracement cycle from MOMO stock’s all-time-low to high and established a hammer low with stochastics turning up from an oversold condition.

Net, net this strategist likes the prospects an intermediate low is in place, but I’m also not so bold as to believe MOMO can’t go lower. At the end of the day and always appreciative of earnings reactions sometimes turning technical forecasts into misguided observations, an out-of-the-money bull call spread looks appropriate from a risk-to-reward standpoint.

MOMO Stock Bull Call Spread

Reviewing MOMO stock’s options, liquidity provision is very attractive with tight markets and narrow strike prices for any number of vertical combinations. One spread which fits in with our belief a bottom is in, bullish momentum can take hold, but won’t leave traders holding the bag in the event Momo tumbles following earnings, is the December $34/$38 bull call spread.

With Momo trading at $32.14 the vertical is priced for $1 and offers a max payout of $3 at expiration if shares are above $38.

Bottom line, this vertical spread offers bullish traders a way to drastically cut down unwanted Greeks, define one’s max loss to just over 3% stock risk and participate in an earnings-driven rally if MOMO can regain some of its prior and more friendly price momentum.

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 and feel free to click here to learn more about how to design better positions using options!

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