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Why Momo Shares Gained 11.5% Today

By Anders Bylund - Jan 12, 2021 at 5:50PM

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A few deep-pocketed investors are playing a big game with the Chinese app maker's stock options.

What happened

Shares of Momo ( MOMO -5.39% ) closed Tuesday's trading 11.5% higher. The maker of instant messaging and social search apps for the Chinese market didn't generate any news of its own, but traders dug deep in Momo's short-term stock options.

So what

Momo's share prices surged when well-known options trader Jon Najarian mentioned his Momo options on CNBC's Fast Money. Najarian talked about "unusual activity" in call options expiring over the next three weeks. Momo call options with three different strike prices were indeed among the 100 most heavily traded options on Wall Street Tuesday, according to data from Barchart. Somebody out there is betting a lot of money on the idea that Momo's shares will rise from Monday's closing price of $13.89 to at least $15.50 per share in the very short term.

Two young Asian women laugh over a shared smartphone.

Image source: Getty Images.

Now what

The bullish option plays would make sense if Momo was surging upward on a full head of steam, but that's the exact opposite of its market action in recent months. The stock is down by 61% over the last year and now trades just 24% above its 52-week lows. Its next earnings report isn't due until the end of March, so the option traders aren't betting on game-changing quarterly numbers to goose the share price here.

One could argue that Momo might benefit from some recently imposed anti-coronavirus restrictions in China, which may limit in-person meetings in ways that push more socializing online for a bit longer. Several small COVID-19 outbreaks have popped up in that country, and the government there has moved aggressively to prevent them from expanding. But more robust restrictions didn't benefit Momo shares in 2020, so why would the situation be different this time?

In the end, market watchers can chalk Tuesday's share price move up to volatility around a modest mid-cap stock that's operating under flighty market conditions. Najarian and his option-trading peers may be on to something here -- but they may also be completely wrong and lose some money on their short-sighted Momo bets.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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