Shares of Chinese entertainment company iQIYI (IQ) are down over 40 percent in the past year. One trader sees rebound ahead for shares.
That’s based on the June 2023 $3.50 calls. With 189 days until expiration, 15,088 contracts traded compared to a prior open interest of 204, for a 74-fold rise in volume on the trade. The buyer of the calls paid $0.89 to make the bullish bet.
Shares recently traded just near $3.50, making this an at-the-money trade. The stock has traded as high as $5.77 in the past year, so the strike price is more than reasonable.
The company saw revenues decline nearly 2 percent in the past year, and the firm has just missed out on profitability. While shares look a bit overpriced at 28 times forward earnings, the stock is most likely to move based on views of the Chinese economy.
Action to take: With a slowing economy in China and a country just starting to end its harsh Covid lockdowns, Chinese stocks like iQIYI may have been unfairly sold off in recent weeks.
Investors can likely see a short-term rebound in shares, in line with the stock’s medium-term rally over the past few months. Look to buy for a quick low-double-digit gain.
For traders, the calls are an inexpensive trade that could deliver high-double-digit returns or better in the months ahead. Look to use any short-term rally in shares to take quick profits, given the current market volatility.
Disclosure: The author of this article has no position in the company mentioned here, but may trade after the next 72 hours. The author receives no compensation from any of the companies mentioned in this article.