MOMO Unusual Option Activity Report

Several weeks ago, I did a session for Theotrade on companies looking to break out and Momo Inc (Nasdaq: MOMO) was one of them. It’s fitting that it’s breaking out today on substantial volume and a commensurate surge in bullish option activity. The original thesis was the company’s valuation and the similar surge in option activity.

Sometimes that price sees immediate movement when bullish option activity picks up. Other times, it can take a while. Either way, using unusual option activity is a refining process for creating a pool of stocks that have potential. That potential can be expressed technically, fundamentally, or both.

From a fundamental standpoint, assessing the company’s profitability, earnings growth and valuation are keys. In the case of MOMO, they are solid financially but with diminished growth. However, the company is trading at a historically good valuation. The valuation coupled with the price and volume trigger today backed by bullish option activity makes the opportunity in this stock compelling.

MOMO Option Activity

The option volume on MOMO is over 20 times the 5-day average today. While the put volume is above average, the call volume was really sizzling at more than 34 times the average. The call volume saw 41% get filled at the ask, which is a bullish indication. While there were no large block trades, there was a lot of activity on the 15 JAN 21 expiration. Here’s a look at some of the significant activity:

• 21,000 15 JAN 21 $14.50 calls mostly BOT at $0.14 to $1.35
• 19,000 15 JAN 21 $15 calls mostly BOT @ $0.06 to $1.00
• 11,500 15 Jan 21 $15.50 calls mostly BOT @ $0.23 to $0.69
• 7,250 15 JAN 21 $16 calls mostly BOT at $0.15 to $0.50

The activity was clearly centered on a short expiration with only 4 days to go. The strikes were quickly engulfed early in the session and the interest began to move to higher and higher strike prices. The size of the activity is significant, but it’s the bigger picture that may indicate a much bigger may be coming up.

MOMO Technicals

The share price of MOMO has been basing for many months. While this is no guarantee of a major move, many significant moves start with these types of formations. Over this period of time, there hasn’t been any strong indication of accumulation before today. As you look at the on-balance volume (OBV) indicator, you’ll notice that it has remained level over this period, even slipping in December. However, today’s 11.6% move saw volume around four times the average.

(Click on image to enlarge)

The price has resistance near $16.50, but the 38.2% Fibonacci retracement level of the 2020 downtrend is near $23. While the option activity is playing a shorter-term move to the recent resistance, the bigger move may carry the price to higher retracement levels.

Conclusion

As you look at the market trading at historically high valuations and price, it can be refreshing to see setups like MOMO. While nothing is a given, the combination of option activity, valuation, and buying activity today makes this a low risk and high potential reward trade.