Shares of Chinese hotel lodging operator Huazhu Group (HTHT) shed nearly 19 percent on Monday as traders reassessed Chinese stocks. However, one trader sees an opportunity on a rebound ahead.
That’s based on the September $45 calls. With 184 days until expiration, 7,881 contracts traded compared to a prior open interest of 194, for a 41-fold jump in volume. The buyer of he calls paid $1.20 to make the trade.
With shares just over $22, they would need to just more than double in the next few months in order for the option to move in-the-money. Given that shares have traded as high as $61.85 over the past year, the strike price would represent a midpoint between the current price and the old high.
While the company has been barely profitable, it looks inexpensive relative to its book value and enterprise value.
Action to take: Investors may want to wait a few days to see if there’s any further fallout in China-based companies. If so, shares could be picked up even more cheaply down the line. Shares of Huazhu don’t pay a dividend at present.
For traders, the same caveat applies. Look for Chinese stocks to stop falling before getting into the trade. Those who wait can likely get into the September calls at a far lower price in the coming weeks.
Traders should also look to take profits on a quick jump in shares, or get out of the trade entirely if a new development occurs that makes the space un-investible.
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.