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Aurora Mobile's Deal With Tencent-Owned Kuaishou Has My Attention

It makes for an intriguing put sell on the $5 strike for February or a combination.
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Aurora Mobile Limited (JG) splashed the headlines this morning when it announced a partnership with Kuaishou. Kuaishou won't resonate with too many investors in the Western Hemisphere but when you mention it is a Tencent (TCTZF) owned competitor to TikTok, now you have the attention of traders. Tencent seems to do a good job supporting the companies that it partners with if not eventually acquiring them altogether.

Aurora aims to improve advertising monetization efficiency via SaaS, which includes machine learning algorithms. JG will receive a revenue share from the advertisers on the Kuaishou application that use its platform. Despite a slew of recent deals, this is still a smaller company, but with a transition to a SaaS business model, JG is projecting quarter-over-quarter growth of 13% to 19% for its SaaS business. Over the past two quarters, cash flow has been positive and the cash on its balance sheet has grown to $64 million.

Shares got a bit ahead of themselves in the pre-market, trading as high as $12.87. Unfortunately, pre-market buyers have been hit hard. Since the open, it's been a straight line lower. The stock has retraced all way to the $6 level with nary a bounce in sight. Before today's action, JG spent the past three months trading between $3.25 and $4.25. I don't think we have reason to see the stock trade below those levels. The deal today should be enough to keep it in the $4.25 to $5.00 range as support. It makes for an intriguing put sell on the $5 strike for February or a combination like the one I've put on shown below.

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The Trade:

(combination calendar put spread and diagonal put spread)

Buy to open 1x March 19 $5 put

Buy to open 1x March 19 $2.5 put

Sell to open 2x Feb 19 $5 put

Net Credit $30

Max Risk $210

Max Return $780

Breakeven $2.10 (until Fed expiration)

Days until expiration: 14 (Feb) & 42 (Mar)

If you don't want to take the risk of the stock retracing all the way to $2.50 or $3.00, then a simple calendar spread here could be considered. Buying the March $5 put and selling the February $5 put will run a trader $40 to $45. That, of course, becomes the max risk on the trade. The upside will only be seen closer to or after February expiration.

At the time of publication, Timothy Collins was Long JG calendar put spreads, Short JG diagonal put spreads.