With recent news that the audit chairwoman for NQ Mobile resigned I thought it would be a good idea to create a "playbook" of trade ideas for everyone.
I construct four trades: Bearish, Bullish, Neutral, and Event Driven.
Going forward the audit results will either crush the stock, or shoot it higher because the stock is heavily shorted.
In this article, I will be constructing three potential trades for a trader/investor, who is looking for a Bearish, Bullish, Neutral, or has an Event driven trade/investment in shares of NQ Mobile (NYSE:NQ). I will not be debating the merits of the accusations that have been laid out by Muddy Waters Research, or bullish arguments from other contributors on NQ Mobile. I will simply be constructing trade ideas as a "playbook" for average traders and investors who are interested in NQ Mobile.
For the average investor who is bearish on NQ Mobile shorting could be an option, however shorting carries a lot of risk, and I prefer to have a defined risk especially for a stock like NQ Mobile. If you believe the Muddy Waters Research and you think NQ Mobile is going to Zero, a bearish trade idea would be to buy January 2015 $4 puts, which at the time of this writing are trading for $142/contract.
For the average investor who is bullish on NQ Mobile the simplest and best choice would be to buy the stock as it is currently right near the lowest price shares have been since the end of 2011. If the audit for NQ mobile turns out to be positive for the company, shares could soar because according to Finviz, NQ Mobile currently has 50.57% of its float sold short, therefore any good news could mean a massive short-covering rally.
For someone who is bullish on NQ Mobile but realizes there is significant risk that could occur if the NQ Mobile audit is not favorable for the company, a hedged trade could be the solution. This trade would involve going to long shares of NQ Mobile, and at the same time buying as close to equal of dollar amount in long stock. To put on this trade currently, it would involve going long the stock at current levels at around $4.48, and buying 3 January 2015 $4 puts, to offset the long position. The table below is an example of how this strategy has performed recently starting on June 2nd 2014, until today. As you can see even though the share price of the common stock has fallen nearly 42%, by buying puts an offsetting dollar value of puts, the trade has been slightly profitable.
Current Investment Value
Event Driven Trade
With the audit of NQ Mobile still in progress, the results of the audit will either crush the stock, or send it significantly higher. If you are unsure about the direction, a good way to play both sides would be to buy an out of the money option strangle. A strangle is where you buy the first out of the money call, and out of the money put option. For NQ Mobile this would mean buying a January 2015 $5 call option currently trading at $165/contract, and a January 2015 $4 put currently trading at $142/contract. The key here is to buy an equal number of calls & put contracts.
In closing, I believe my NQ Mobile trade playbook could help traders & investors who are willing to take the dive into this contested stock. In addition, affecting your decision would be the matter of time horizon, in my examples I used January 2015 to give time for the audit results to be released. If you think, the results will come out sooner than that you can buy closer dated options or if you think it will be after January 2015, or are bullish or bearish for the long-term, then buying options for January 2016 could be a choice as well.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.