Momo Inc MOMO stock has tumbled 4.3% in the past week after U.S. President Donald Trump said trade talks with China still have “a long way to go.”
Despite the potential bearish news, at least one large bear appears to be dialing back option exposure to Momo on the short side.
The Trades
On Wednesday, Benzinga Pro subscribers received two options alerts related to Momo.
At 10:45 a.m., a trader sold 1,000 Momo put options at a $34 strike price that expire on Friday. The puts were sold at the bid price of 95 cents and represent a $95,000 bullish bet on Momo shares.
The next large trade came about two minutes later. Likely the same trader sold another 698 Friday $34 put options at the bid price of 75.3 cents. This sale represented a $52,559 bullish bet on Momo.
Together, the two trades represented a nearly $150,000 bullish bet on Momo.
Why It’s Important
Due to the relatively complex nature of the options market, options traders are generally considered to be more sophisticated than the average stock trader. In addition, large options traders are often professional, wealthy individuals or institutions, either of which could have unique insight or information about a company.
Even traders who stick exclusively to stocks watch the option market closely for unusual trading activity as an indicator of where the “smart money” is focusing.
Unfortunately, because stock investors often use put options to hedge larger bullish stock positions, there’s no way to be 100% certain whether an option trade is a standalone purchase or a hedge against a stock position.
Given the relatively modest size of the two Momo trades on Wednesday, it’s unlikely they were hedges in this instance.
China Rebound?
The trader dumping Momo puts Wednesday may be taking profits on a previous bet that volatile trade talks between the U.S. and China would once again break down at some point.
On Tuesday, Trump again threatened China with tariffs on an additional $325 billion of imported goods. Trump has previously said he was suspending plans for these additional tariffs following a face-to-face meeting with Chinese president Xi Jinping at the G20 summit in June.
As part of the G20 negotiations, Trump said he intended to ease restrictions on blacklisted Chinese telecom giant Huawei, and Trump said China pledged to increase its spending on U.S. agriculture. China has not publicly confirmed that commitment, but Trump said Tuesday he is watching closely to see if China follows through.
Momo shares are now down 25.3% over the past year, and the stock is trading at a forward earnings multiple of under 10. Perhaps Wednesday’s put seller believes the negative momentum in Momo and the negative headlines out of China are exhausted in the near term after heavy selling pressure over the past four sessions.
Momo's stock traded around $32.92 per share at time of publication.
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