Tech is hot this year. As of 7/10/2020, QQQ is up over 24% while the SPY is still down (a bit). This week, we cover a stock you’ve probably never heard of – Momo Inc. (Ticker: MOMO). Descriptions are generic, but essentially it is a social networking and entertainment platform and has been referred to as the “Chinese Tinder”. A Google translate version of their home page promises users can “Enter the world of Momo and meet those strange and interesting people”. I’m sold. Here is how the stock has performed over the last 6 months:

6 Month chart of MOMO

A few things to note. This stock is down and has stayed down since the beginning of the year. Implied Volatility is Very, Very high, but note that it remains above historical volatility – both on a percentage and absolute basis. How to take advantage? We sell options.

  • Sell 21 August 16 puts for 0.28
  • Price is at the midpoint as of 7/10/2020
  • All trades are for educational purposes and do not constitute financial advice.

The put is priced below the stock’s recent low of 16.61. In fact, one has to go all the way back to 2016 before MOMO traded below this level.

MOMO makes money (trying to avoid a Mo Money Mo Problems reference in this post). Quite a bit. Sales and Free Cash Flow per share have been steadily growing as well. It trades at a low valuation compared to its 5 year averages. Seems like a screaming buy – what is the problem?

While it trades on the US exchanges, it is a Chinese company. Given events around TAL Education and Lucking Coffee earlier this year, plus the fact that China restricts certain freedoms (press, open access to the internet), there is certainly risk with this trade and one should size it accordingly.

If the puts expire worthless, the trade will return 1.8% on the maximum risk ($1572/put spread), defined as the stock going to $0. Your actual return on margin will be higher. Annualized, this is 16.3%. You won’t get rich on the trade alone, but continually making this type of return would be terrific and well above the broad based market.

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