Heading into SINA’s Q1 earnings print last month we thought the risk/reward playing for a bounce inline with the implied move looked attractive given the stock’s oversold nature given its prior negative pre-announcement. Well the company reported results that were inline with prior, but offered less than stellar guidance and the stock did make a new low. The trade we placed, a call calendar that was mildly bullish, started a loser, then became a winner, and now a loser with a low probability of success. With time running out and the strike seemingly farther and farther out of the money we think it makes sense to close this trade before it becomes a total loss:
ACTION: Sold to close SINA ($44) June 50 calls at .25 for a .75 loss
SINA, the Chinese internet company is scheduled to report Q1 earnings tonight after the close. The options market is implying a one day move of about 6.5%, which is basically in line with the 4 qtr average of about 6.25% an, but well shy of the 8 qtr avg move of about 8.35%.
The one year chart is nothing short of a train-wreck, down 47% from the 2014 highs made in early January and down 43% on the year. The 3 year chart below shows the importance of the stock’s recent break below $50, with no real technical support until the low $40s:
Despite the stock’s poor performance, the recent consolidation has calmed options prices, with the 30 day at the money implied vol 15 points off the recent highs, and well below the levels prior to its last 3 earnings reports. While options prices are cheap relative to earnings prints past, they still remain fairly high and should come in another 20% following the report:
One logical reason for the sell off in IV since the start of the month was the company’s negative pre-announcement on May 2nd (here), which should take some mystery out of the report.
Our View: SINA recently spun out their Twitter-ish service called Weibo in a U.S. IPO, and the stock uncharacteristically has traded poorly since, despite Weibo (WB) up about 18% from last month’s IPO. Sentiment could not be worse towards the stock, taken together with the oversold nature of the chart you would have to “know something” to press the stock on the short side.
With a bit of the news out of the way, and the potential for mildly better guidance we like the idea of selling very short dated options (Friday) and buying longer-dated (June) and play for a bounce inline with the implied move.
TRADE: SINA ($47.62) Bought May 23rd/ June 50 call spread for 1.00
-Sold to open May23rd 50 call at .66
-Bought to open June 50 call for 1.66
Break-Even on May 23rd (Friday) expiration:
-Profits are maximized at 50 on May 23rd expiration. Slight moves above and below that strike are also profitable with big moves higher or lower putting the structure at risk of losses on expiration.
-Max risk is 1.00
THIS IS NOT A HIGH CONVICTION TRADE, BUT GIVEN POOR SENTIMENT AND TECHNICAL SET UP, WE LIKE THE RISK REWARD FOR A SMALL TRADE INTO THE PRINT.