I wanted to provide another update to my previous take on Alibaba (BABA), as there has been intense action since BABA shares went public back in September, when nearly everyone was calling for a market top.
With Alibaba shares continuing to trip fresh highs this week, I wanted to update the BABA trade I profiled last month.
The options on Alibaba continue to trade at premium prices but with great bid/ask spreads and liquidity. In early October, trying to predict where shares would be in three weeks or three months was useless on a technical level due to the limited chart history, but headline news has been able to move the shares.
The BABA January 2015 100 calls and the BABA January 2015 80 puts were going for a little over $3 apiece for the strangle option trade in early October. These options were roughly $10 out-of-the-money when shares were at $90. I said that Alibaba needed to be above $106 or below $74 for this strangle option trade to break even, technically, by mid-January. I also mentioned that if Alibaba shares were above $110 or below $70, this trade would come close to making a triple-digit profit, as either the call or put option would be worth at least $10.
As you can see, the BABA January 100 calls continue to shine, as they are showing a return of over 500%, while the BABA January 80 puts are down over 90%. If both Alibaba options were closed at current levels, the premiums would be approximately $19.50 for both the calls and puts. From an entry price of $6, this is a return of nearly 225%.
Such is the beauty of strangle option trades, which are also known as “chicken trades.”
I was a little hesitant to pay $6 in premiums, as I prefer to trade options for $1.50 or less. However, with sentiment low and “blood in the streets,” the Alibaba opportunity was too good to pass up.
There will be another opportunity next week, next month or next year to play Alibaba, as the technical chart analysis is improving. Shares have only traded for 36 sessions, and I said that headline events (and earnings) would drive the stock higher or lower for the rest of the year.
When the time comes to trade Alibaba again, the risk/reward could be even better, as technical and fundamental analysis can be used to help figure where shares could trade in 2015.
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