Pinduoduo Inc PDD shares traded higher on Friday following reports that the U.S. and China are in the process of finalizing some parts of a trade deal.
Pinduoduo has seemingly been impervious to negative trade war headlines up to this point, up 136% over the past year, but a trade deal would certainly remove a major uncertainty for the second-largest Chinese e-commerce company.
Despite the huge gains, some large options traders are making some big bets on more Pinduoduo upside ahead.
The Trades
On Friday morning, Benzinga Pro subscribers received two option alerts related to unusually large trades of Pinduoduo.
At 10:00 a.m., a trader bought 1,300 Pinduoduo call options with a $43 strike price expiring on Nov. 15 near the ask price at 85 cents. The trade represented an $110,500 bullish bet.
About five minutes later, potentially the same trader bought 1,131 Pinduoduo call options with a $42 strike price expiring on Jan. 17, 2020 near the ask price at $3.40. The trade represented an $384,540 bullish bet.
The larger of the two bullish trades represents a break-even price of $45.40, suggesting Pinduoduo shares have at least 11.4% additional upside in less than three months.
Why It's Important
Even traders who stick exclusively to stocks often monitor option market activity closely for unusually large trades. Given the relative complexity of the options market, large options traders are typically considered to be more sophisticated than the average stock trader.
Many of these large options traders are wealthy individuals or institutions who may have unique information or theses related to the underlying stock.
Unfortunately, stock traders often use the options market to hedge against their larger stock positions, and there’s no surefire way to determine if an options trade is a standalone position or a hedge. In this case, given the relatively modest sizes of the two individual Pinduoduo call trades, they were unlikely to be institutional hedges in this instance.
Trade Deal Catalyst?
The Office of the U.S. Trade Representative reported Friday the U.S. and China made significant progress in finalizing some parts of the phase one trade deal President Trump announced earlier this month. The latest trade war news comes after the International Monetary Fund said China’s economic growth rate could fall to just 5.8% next year as the trade dispute drags on.
Interestingly, the Nov. 15 calls purchased on Friday morning expire exactly one day before Pinduoduo is expected to report earnings, suggesting this is not a bullish bet on a strong third quarter.
Benzinga’s Take
While Friday’s trade war headlines are certainly a positive for Chinese stock investors, all headlines and statements related to a trade deal continue to be riddled with qualifiers and vagueness. The USTR said China and the U.S. and “close to finalizing some sections” of a phase one deal, which is far from the completed comprehensive deal U.S. and Chinese companies need to get a clear picture of the path forward.
Given several instances of trade negotiation breakdowns between the U.S. and China in the past year, investors should take any news related to progress with a grain of salt until an official trade deal is announced.
Do you agree with this take? Email feedback@benzinga.com with your thoughts.
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Photo courtesy of Pinduoduo.
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