Call Buyers Win Big as Weibo Stock Soars – Schaeffers Research (blog)

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Subscribers to Schaeffer’s Weekend Trader service recently doubled their money on Weibo Corp (ADR) (NASDAQ:WB) October 70 calls. Below, we’ll break down what first drew us to WB stock, and how the bullish options trade went on to hit its target profit.

We first recommended buying Weibo call options on Monday, July 24. The Chinese social media stock had more than doubled in value on a year-over-year basis — and was up more than 82% in 2017 alone. What’s more, the shares had recently broken out above short-term resistance at the 50-day moving average. 

Additionally, ahead of Weibo’s most recent ascent, other U.S.-listed Chinese internet stocks — such as Alibaba, Baidu, and JD.com — had started to see relative strength versus the broader equities market. This indicated underlying bids were entering the marketplace.

And despite WB’s strong price action, expectations were low toward the stock — pointing to potential buying power to help boost it even further up the charts. For starters, Weibo’s Schaeffer’s put/call open interest ratio (SOIR) stood at a top-heavy 1.06, and ranked in the 68th annual percentile. This hinted at a wider-than-usual put-bias among short-term options traders.

Plus, WB was heavily shorted. While short interest on the stock continued to increase in early 2017 alongside its price, this buildup of losing bets hit a near-term peak in mid-May before turning lower, suggesting a short-covering rally was underway. However, more than 38% of the stock’s available float was still sold short. A capitulation from some of the weaker bearish hands could certainly help keep the wind at Weibo’s back.

It also was an attractive time to buy options on WB, too. The stock’s Schaeffer’s Volatility Scorecard (SVS) was docked at 91, suggesting the stock had shown a tendency to make bigger-than-expected moves in the last 12 months, relative to what the options market had priced in.

As expected, the security continued its uptrend after we entered the bullish options trade, with its 50-day moving average serving as a springboard for the shares. On Tuesday, Aug. 8, Weibo shares hit a record high of $88.88 — the same day we closed our October 70 calls for a 101% gain.

wb stock daily chart august 10

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