Alibaba Group Holding Ltd (BABA) will step onto the earnings stage on Wednesday of next week, and Wall Street is expecting solid year-over-year results. BABA stock is currently pulling back from overbought levels, and options are pricing in a respectable post-earnings move. This sets the stage for options traders looking to get in ahead of the event.
Digging into the numbers, Wall Street is looking for Alibaba earnings to rise 21% to 56 cents per share in fourth quarter. Revenue, meanwhile, is seen gaining 32.6% to $3.56 billion. (All currency figures converted to USD from renminbi.) Historically, Alibaba has had trouble meeting these forecasts, with economic concerns and Chinese manipulation of the yuan creating turmoil.
Still, the brokerage community remains solidly bullish on Alibaba stock. According to data from Thomson First Call, 32 of the 37 analysts following BABA rate the stock a buy or better, compared to four holds and just one sell rating. The 12-month consensus price target of $91.06 represents a healthy premium of 19.2% to Thursday’s close, but there is room for potential upward revisions following a solid report.
Turning to the options pits, speculative short-term traders are leaning bullish on Alibaba. Currently, the May put/call open interest ratio comes in at 0.87, with calls outnumbering puts among near-term options. This ratio slips to 0.78 when we zero in on just the weekly May 6 series – i.e. those options most affected by next week’s earnings report.
Click to Enlarge Overall, weekly May 6 series implieds are pricing in a potential post-earnings move of about 6.25%. This places the upper bound at $81.28, while the lower bound lies at $71.72.
A post-earnings rally would leave BABA shy of resistance at $82, while a decline would put the stock below several key layer of support, including Alibaba’s 50-day and 200-day moving averages.
2 Trades for BABA Stock
Call Spread: The recent pullback to support should be a positive development for Alibaba, as entering earnings in oversold territory would leave the stock vulnerable to a sell-on-the-news event. Barring any Chinese economic issues, BABA could be set to resume its former rally. As such, traders looking to jump on the bullish bandwagon might want to consider a May $77.50/$80 bull call spread. At last check, this spread was offered at 89 cents, or $89 per pair of contracts. Breakeven lies at $78.39, while a maximum profit of $1.61, or $161 per pair of contracts, is possible if BABA stock closes at or above $80 when May options expire.
Put Sell: If you are concerned about broad-market headwinds or potential Chinese economic issues, then a BABA put sell may be a more neutral path toward profit. At last check, the weekly May 6 series $70 put was bid at 47 cents, or $47 per pair of contracts. As long as Alibaba stock trades above $70 through expiration next Friday, traders pursuing this strategy will keep the $47 premium. However, if BABA trades below $70 ahead of expiration, you could be assigned 100 shares for each contract sold at a price of $70 per share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
