This Momo Stock Buy Signal Shouldn't Be Missed

Call open interest levels have been steadily rising on Momo Inc (ADR) (NASDAQ:MOMO) throughout 2017, along with the stock's price. While MOMO shares have nearly doubled in value year-to-date, call open interest is currently docked in the 89th annual percentile. It looks to be a prime time for call buyers to continue to target the stock, considering short-term options premiums are attractively priced and MOMO is trading near a historically bullish trendline.

Taking a quick step back, MOMO call open interest hit a 12-month low of 6,413 contracts on Jan. 23, when the shares were trading around $23. Since then, call open interest has swelled to 62,210, and hit a 52-week peak of 91,586 contracts on Aug. 25.

While the October 35 put is home to MOMO's top open interest position of 16,493 contracts, peak front-month call open interest of 6,820 contracts is found at the October 40 call. While it's not entirely clear if traders bought or sold the puts, data from the major options exchanges confirms mostly buy-to-open activity at the call strike. This suggests traders expect Momo stock to be sitting north of the round $40 mark at the close on Friday, Oct. 20 -- when the series expires.

It's entirely possible some of the recent call buying -- particularly at out-of-the-money strikes -- is a result of short sellers using options to hedge against upside risk. Short interest on MOMO surged 135% in the latest two-week reporting period to 6.14 million shares, the most since June 2015.

Regardless of the reason, unusually low volatility expectations are being priced into the stock's short-term options -- a potential boon to premium buyers. Specifically, MOMO's Schaeffer's Volatility Index (SVI) of 46% ranks in the bottom percentile of its annual range, while the equity's 30-day at-the-money implied volatility of 47% rests in the 3rd annual percentile.

Looking at the charts, MOMO shares have certainly been impacted by the impressive rise in short interest. Since topping out at a record high of $46.69 on Aug. 8, the stock has shed nearly 22% to trade at $36.53.

However, the security is not trading within one standard deviation of its 160-day moving average after trading above it for most of the past two months. According to data from Schaeffer's Senior Quantitative Analyst Rocky White, in the two other times this signal, MOMO stock has averaged a 21-day gain of 21.5% -- boasting a 100% win rate!