Alibaba Group (BABA) is due to report earnings on Jan. 28 before the market opens, and analysts have high hopes for the stock. Earnings are expected to come in at 70 cents per share, and revenue is forecast to show 22% improvement year-over-year.
Zachs Investment Group upgraded the stock to a “Buy” on Monday with a $79 price target, while Morgan Stanley recently upped its price target on Alibaba stock from $101 to $115. But rather than buy BABA at current levels of $69.72, I prefer to sell put options to position to be a buyer of BABA stock at $59.05, or a 15% discount.
Technically, Alibaba stock seems to have found its footing, with the price action from Jan. 20 looking especially encouraging. Shares of BABA traded down to $65.34 on that day, only to reverse course and close at $68.71 — a solid 5.15% rally off the lows. This type of price reversal is many times indicative of a short-term low in share prices.
Fundamentally, Alibaba stock is trading at a price-to-earnings ratio of 19, which is in line with the overall market. With revenues expected to grow at a robust 22%, paying 19 times earnings is comparatively cheap.
Fears of a slowdown in China have previously weighed on BABA stock, but BABA’s recent outperformance in compared to the S&P 500 further highlights the relative attractiveness of Alibaba stock on a valuation basis.
The fears of a slowdown in China have certainly found their way into the options market, with implied volatility (IV) at the highest levels ever for BABA. This heightened IV is many times a reliable contrarian bullish indicator, and also means that option prices are very expensive, making option-selling strategies more rewarding.
Alibaba Stock Options
To position to be a buyer of Alibaba stock at lower levels, I would look to sell Alibaba stock using the Feb $60 put at 95 cents. This means you would be obligated to buy 100 shares of BABA stock at $60 for each put option sold. Factoring in the 95-cent initial credit received for selling the Feb $60 put makes the net cost $59.05, which is a 15.30% discount Alibaba’s current levels around $69.80.
The $59.05 net entry price would be just 2.89% above BABA stock’s all-time low. As I mentioned in a recent TV appearance, it’s a great entry level for Alibaba stock.
So, for investors looking to be a buyer of BABA on further weakness, the options market can provide a very viable way to get paid now while positioning to be a buyer on a dip.
As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the Delta Desk Research Report can email Tim at tbiggam@deltaderivatives.com.
