This past week was a nasty one for some margined bulls trading the Shanghai Index and other high-flying Chinese proxies such as the U.S.-listed Deutsche X-Trackers Harvest CSI 300 China A-Shares Fund (ASHR). But as many of those constituent stocks are reeling from even larger and technically messy, double digit losses; JD.com (JD) has managed a constructive pullback in JD stock that might provide a nice opportunity for options traders.
According to Bloomberg, the sell-off may not be over yet. Margined trading accounts of at least $364 billion could still threaten to do additional harm to Shanghai stock market despite prior week’s dramatic fall and the index’s worst since 2008.
There’s also the potential impact of what aggressive levels of insider selling in Chinese shares might mean for the future near-to-intermediate term prospects for JD stock. Barron’s noted insider trading this year is up eight-fold and at record levels according to monthly trading statistics
More optimistically, for a name like JD.com, an online direct seller of electronics, books, home appliances in the People’s Republic of China, the abrupt sell-off has resulted in an attractive technical opportunity.
JD Stock Weekly Chart
From the provided weekly chart of JD stock we find that since being listed a year ago, shares of spent the bulk of that time in a nice cup-shaped base after hitting its initial all-time-highs last August.
After seven months of basing in a fairly standard correction of about 35% and in keeping with a typical growth stock correction following a sizable run on the chart; JD stock broke out in April of this year. The action, however, didn’t take shares of JD very far, but that’s OK.
While most anyone if asked would prefer our breakouts to simply take off like rocket ships, JD stock’s smaller cup-shaped base of seven weeks is of the base-on-base variety and is considered a technically constructive pattern.
The fact JD stock also found support off prior resistance as the two horizontal lines overlaid on the chart show during this smaller base is, for lack of a better word, supportive.
And in the here and now and as bearish overtures rule the headlines in Chinese stocks, once again, JD stock’s price action has been favorable.
First, the roughly 10% pullback from highs has been much less severe suggesting sellers have less reason to fear JD stock; which given what’s been said, makes sense technically.
Secondly, the retreat in JD stock has found support at the 50-day simple moving average which many traders view as critical to keep a trend intact. While I’m agreeable to that, I’m more an advocate of limiting my risk to a bull call spread.
JD Stock July Bull Call Spread
With it’s unwavering and defined risk compared to a moving and sometimes elusive moving average and the use of a stop loss; a bull call spread in JD stock makes the task of knowing what our actual risk-to-reward profile transparent.
As we’re dealing with options which have a limited lifespan and are prone to decay and volatility risks, as well as the possibility of future headline hysterics out of China’s equity markets; the bull call spread is an even more attractive strategy to consider in JD stock.
In reviewing the board for ideas, I like the Jul $35/$37 bull call spread priced for mid-market at 70 cents as one way to make use of JD stock’s dollar strike offerings and strong liquidity.
This bull call spread does require shares of JD to move higher by about 3% to break even on an expiration basis. However, if the stock moves in that direction sooner, profits will come to the position earlier.
And if shares make their way above $37 and a level still below recent highs the trader can net $1.30 profit. Finally, with the spread’s risk defined by roughly 2% of the JD stock price; buying the dip for 70 cents cash is made a good deal more approachable during China’s margin madness.
As of this writing, investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon his observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.
