Shares of SOS Limited (NASDAQ:SOS) seem to have finally found some footing after a sharp selloff. In the middle of February, SOS stock had rocketed past the $15 area on a short squeeze before plunging back to reality near the $5 level. Now, speculators have embraced it, especially given the low stock price, small float and high short interest.
Moreover, both stock and option volume have exploded over the past few months. This increased volume provides the opportunity to speculate, but in a lower-risk manner that still allows plenty of upside.
When it comes to SOS, forget the fundamentals. It has yet to show profit and revenue growth. The company initially provided emergency rescue services, but it recently morphed into a cryptocurrency play, likely to take advantage of the red-hot crypto space. The company description on Robinhood’s website says it all:
“SOS Ltd. is a holding company, which provides marketing data, technology and solutions to the emergency rescue services in China. It focuses on the research and development of big data, cloud computing, Internet of Things, blockchain and artificial intelligence.“
That description has every buzzword you could imagine in describing the company. This smacks of the late 1990s, when many small companies became internet incubators to take advantage of investor appetite. So, the question is not how the party will end, but how long the party can go on.
The short interest with SOS is at an extreme, by some accounts higher than 200%. The recent pump and dump from $4 to $15 then back to $4 in mid-February was evidence of a classic short squeeze.
Recently, InvestorPlace contributor Robert Larkin recently took a deep dive into the short-squeeze aspects here. SOS stock broke through the $6 level on Apr. 7, before the squeeze attempt failed. Now, shares have fallen over the past few days, closing at $5.25 on Friday.
Technical Take on SOS Stock
SOS is actually starting to improve on a technical basis. The 9-day RSI has turned higher after reaching oversold levels. MACD has bounced off recent lows and is poised to generate a buy signal. Momentum has firmed and looks to be ready to head into positive territory.
There is major support and a double bottom at the $4.20 area. A close back above the 20-day moving average at $6.08 could be the impetus for a further leg higher in SOS stock.
Source: The thinkorswim® platform from TD Ameritrade
I tweeted about the insane option volume on April 7 with nearly 700,000 calls trading on the day.
Over 40,000 April 6 $6 strike calls traded that day. More importantly, this massive call buying juiced implied volatility (IV) on these options from $141.23 the day before to over $230 on April 7. Friday saw even more big time call buying with another 13,000 contracts trading.
Such high levels of implied volatility means option prices are extremely expensive. This favors option selling strategies when constructing trades. So to take a guardedly bullish stance on the potential for another short-term short squeeze, a covered call strategy makes probabilistic sense.
Trade Idea
Buy SOS stock and sell May $5 calls for a $4.10 net debit or better.
Selling the May $5 calls reduces the downside by 20% while still leaving some overall upside appreciation open. Ideally SOS closes above $5 at May expiration. In this instance your short call will be assigned to close out the trade for a 22% net return in 38 days.
The May $5 calls have a 70 delta — the equivalent of 70 shares of stock. This means by selling these calls against your long stock (which has 100 delta) you reduce the exposure to just 30 deltas, or 30 shares of stock.
If SOS stock closes below $5 at May expiration, additional calls can be sold against the remaining long stock to bring in more premium and further reduce the downside risk.
On the date of publication, Tim Biggam did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Anyone interested in finding out more about option-based strategies or for a weekly option and volatility newsletter can visit the Options and Volatility Newsletter website.
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April 14, 2021 at 03:18AM
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A Lower-Risk Way to Play the Potential Short Squeeze in SOS Stock - InvestorPlace
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