Macro Dragon Reflections: Weibo Erns due pre-mkt Wed, we chk-in with ‘the lone bull’ in a China Tech Bear Mkt. WB $50.76 -3.6% o/n +24 YTD

Dragon Reflections: Weibo Erns due pre-mkt Wed, we chk-in with ‘the lone bull’ in a China Tech Bear Mkt. WB $50.76 -3.6% o/n +24 YTD

Top of Mind…

• WB $50.76 -3.6%, starting to breakdown, new intraday low of $49.545 hit yest. We originally were flagging this in the high 50s to low 60s lvls. Name is still +24% YTD, vs. say Alibaba, Tencent, Baidu or JD.COM that are down anywhere from -20% to -23% YTD
  
  
  
  
• So actually despite the WB breakdown, relative outperformance wise its still maintaining a ludicrously wide spread of +40% against companies that are arguably some of the best business models & motes in the world. Weibo has cont. to operate in a vacuum
  
  
• Worth noting overnight move was on very little volume, under 50% of avg. 1.4M. Generally speaking volume has been abysmal, which leaves KVP thinking its been synthetically kept up… with real test of this being how name trades after earnings on Weds (pre mkt)
  
  
• Suggests to me, when we really puke, need to watch volume explode
  
  
• If you look at the daily, next key support is likely the $48-50 lvl, which is also where we starting to break out higher on Jun 23. Naturally the rest of the space has completely crated since then, so that support should not hold from a relative perspective at least.
  
  
  

• On Weekly its likely $46.815 is an easy takeout lvl of 50% fibo retracement, with the juice of the down move falling in the $37.37 to 42.59 range
  
  

• Earnings wise, we know their 1Q figures were strong (low base as per rest of China space, i.e. 1Q20 was ground zero for China economic data). Worth noting that Baidu which recently reported was conservative in regards to 2H figures

• Expectations for 2Q21 are at +0.62 EPS (142.5M Net Income), +$524M Revenue, Gross Margin of 83%

• On our original Macro Dragon Reflections on potential positioning here
  
  
• “From the Macro Dragons perspective the 55 or 50 strike 20 Aug (40D) puts look interesting at a premium outlay of 1.85 and 0.80 respectively, yes the implied vol is high at 51.94 & 59.22 respectively vs. the 30D historical vol of 36.62… Yet the vol should be well supported if the shares tank. Likely outlay of 25-50bp of risk, so say $25K to $50K premium outlay in a $10M portfolio, with the thesis of potentially making at least +3x to 5x, or +$75K to 250K on that premium outlay.”
• The 55 Strike 20 Aug puts are now worth at least 5.20 (5.40 was last offer), with the 50 strike puts now worth at least 1.80 (2.05 was last offer), these are +2.8x & +2.3x returns on initial premium – which given the trade view was flagged on Jul 12, is great return on an annualized basis (i.e. c. +24x an.). Its also worth noting that we did get to $5.17 on Jul 27^th on the 55 Strike put, but it was literally for one session, so one would have had to have been super tactical to take some off there.
• So PNL wise that c. $25,000 to $50,000 of premium would be worth anything from $70,300 to $140,500, or c. +0.45% to +0.91% in the $10M portfolio, far from a slam dunk (yet?!) yet still very decent overall pnl contribution.
• The killer here has been the time it takes for the stock to breakdown consistently (we did get to $51.25 in the last wk of Jul, yet the name popped back up), as we have lost quite a bit of time value on the initial premium outlay.
• Its worth noting that vol is likely to come off hard post earnings, for context the 55 & 50 strikes are trading at an implied vol of 105. This compared to their counterpart strikes in the 17 Sep expiries that have an IV of c. 56-58, close to 50% lower. So worth thinking of rolling the maturity for those that have not, as well as potentially rolling down the strikes & maturity (i.e. take profit, yet still leave exposure on).
• Still think there is juice to a ‘proper’ breakdown that should happen sooner after earnings (which is a key risk, could go either way), but risk continues to be timing, potential bottoming out & bull market on China tech which may damped the relative re-valuation of Weibo vs. its peers. Intuition still suggests we walk in one day & name is easily down -10% to -15%, yet that could just be anchor & confirmation bias talking.
• Let’s take a look at the other trade construction around this theme, which was an outright short position on the stock.
• “Naturally if the Dragon wanted to be short outright, then he’d likely only do so with either a $150K to $65K short position, factoring in for a potential squeeze ‘worst case’ scenario of the takeover rumor's being true, in which case a move to $90 to $100 on the stock would have a loss of c. -$25K to -$50K (equivalent to the premiums discussed above).” 
  
  
  • The directional trade on MtM short from $60.03 to yest close of $50.76, would have netted a profit of +0.23% to +0.10% depending on the size taken & cost of borrow.
  • The thing that is hard to measure here, an outright exposure would have been easier to trade around the volatility of the stock – rather than having to pay out the wide spread on some of the option contracts. We’ve had a peak to trough swing of -15% to then +14% to now -15% from around the time the idea was flagged, which would have been easier to trade around that if one was just long the puts or had some put spreads on.
  • So whilst one can be tactically trading in & out of super liquid options on say Tencent, it just does not make sense for Weibo.
• Lets see what tmr’s earning & company guidance brings, would expect an analyst question on the fake take-over rumour (that were dispelled by the company) that kicked off this bullish vacuum operation from early Jul (despite breakout higher kicking off in mid Jun).
  
  
• Everything else being equal - & barring a super bullish earnings & positive outlook, as well as real takeover risks, or/& huge support from China policy makers (which the Macro Dragon believes will materialize at some point in 2H21) – KVP continues to believe that the easy move on Weibo is to say $40-45, assuming the greater China tech space does not go back to make new lows. So either that lvl or a big breakdown in Weibo, say -10% to -15% over a day or two would likely be used to close off the trade. The Dragon would not leave any Aug expiry options past Wed’s session.
  
  
• Link to Weibo’s 1^st Quarter Earnings Results.

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Start<>End = Gratitude + Integrity + Vision + Tenacity | Process > Outcome | Sizing > Position.

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Namaste,
KVP