Why Momo Shares Gained 11.5% Today

What happened

Actions of Momo (NASDAQ: MOMO) closed Tuesday’s trade up 11.5%. Chinese market instant messaging and social search app maker has not generated any news, but traders have dug deep into Momo’s short term stock options.

So what

Momo’s stock price surged when famous options trader Jon Najarian mentioned his Momo options on CNBC Quick money. Najarian referred to “unusual activity” in call options expiring over the next three weeks. Momo calls with three different strike prices were indeed among the 100 most traded options on Wall Street on Tuesday, according to data from Barchart. Someone is betting a lot of money on the idea that Momo’s shares will drop from Monday’s closing price of $ 13.89 to at least $ 15.50 per share in the very short term.

Image source: Getty Images.

Now what

Bullish option games would make sense if Momo went full blast, but this is the exact opposite of his market action in recent months. The stock is down 61% from a year ago and is now trading just 24% above its 52-week lows. Its next earnings report isn’t due until the end of March, so options traders aren’t betting on game-changing quarterly numbers to determine the stock price here.

It could be argued that Momo could benefit from some recently imposed anti-coronavirus restrictions in China, which could limit in-person meetings in a way that promotes greater socialization online for a bit longer. Several small outbreaks of COVID-19 have emerged in this country, and the government has acted aggressively to prevent them from spreading. But tighter restrictions haven’t benefited Momo shares in 2020, so why would the situation be any different this time around?

Ultimately, market watchers may attribute Tuesday’s rise in the share price to volatility around a modest mid-cap stocks which operates in unstable market conditions. Najarian and his peers in options trading may be on to something here – but they can also be completely wrong and lose money on their short-sighted Momo bets.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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