$MOMO calls make quick gains

Bullish option traders have more than doubled their money in Chinese tech company Momo (MOMO).

Just yesterday on Apr. 6, Market Rebellion’s Unusual Activity Service found that 2,000 April $22 calls were bought for $0.64, as part of a bullish spread, with shares at $21.29. This was clearly fresh buying, as open interest in the strike was 571 contracts before the session began.

Those calls, which as a result of a special cash distribution in the underlying, were adjusted to the April $21.26 strike, traded for as much as $1.51 today, more than twice their purchase price. The stock rose 4.7% in the same time frame, underscoring how options can far outperform moves in their underlying shares.

Long calls lock in the price where investors can buy a stock, letting them position for a rally at limited cost with the potential for significant leverage. They carry less risk than owning shares because the most that can be lost is the price of the options no matter how far the stock might fall.

MOMO ended the session up 8.2% to $22.44 today. The Beijing-based mobile social and entertainment platform announced on Mar. 24 that it will pay out a Special Cash Dividend of $0.74 that went ex-distribution today.