It has been an eventfully uneventful two months for Alibaba Group Holding Ltd (BABA). Heading into April, BABA looked poised to breakout above resistance at $80. However, a string of bad news, including an SEC investigation and potential share dilution from Softbank’s decreased BABA stock stake put hopes of revisiting all-time high territory on hold.
With the past month’s events now priced in and digested by Wall Street, BABA may finally be prepared to put its current trading range to rest, and an upside move has the potential to be considerable.
Overall, sentiment is largely bullish toward BABA stock. The brokerage bunch has doled out 33 “buy” ratings versus just four “holds” and one “sell,” while the 12-month consensus price target of $95.53 represents a premium of 22.7% to BABA’s current perch.
Options traders also have mostly bullish aspiration for BABA stock. Currently, the June/July put/call open interest ratio for BABA rests at 0.74, which rests in the lower third of the past year’s worth of readings. In other words, call traders have rarely been more short-term bullish toward BABA stock.
But this seemingly bullish call bias may have another implication for BABA stock. Specifically, despite a 5% decline in the most recent reporting period, short interest still totals 77.4 million BABA shares — gobbling up 8.44% of the stock’s total float, or shares available for public trading.
Click to Enlarge Why would call open interest matter here? Because short sellers typically buy at- or out-of-the-money call options as a means of hedging their positions.
As such, some of BABA’s near-term call open interest may be focused on hedging many of the short positions currently levied against the stock.
While this protects against some upside, there is still the potential for a squeeze situation, especially if BABA makes a firm break with $80 and heads back toward the $90 region.
2 Trades for BABA Stock
Call Spread: One way to take advantage of such a situation for BABA stock is with a bull call spread. At last check, the July $80/$82.50 bull call spread was asked at 76 cents, or $76 per pair of contracts. Breakeven lies at $80.76, while a maximum profit of $1.74, or $174 per pair of contracts, is possible if BABA stock trades at or above $82.50 when July options expire next month.
Put Sell: If a more neutral positions suits your trading style more, the June $72 put sell position has a solid chance at finishing out of the money. At last check, this put was bid at 21 cents, or $21 per contract. Remember that you keep the initial premium received as long as BABA stock closes above $72 when June options expire at the end of next week. If BABA trades below $72 ahead of expiration, however, you could be assigned 100 shares of BABA stock for every put sold at a cost of $72 per share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
