Shares of Alibaba Group Holding Ltd (NYSE:BABA) finally closed back above the magical $100 level for the first time since January 2015.
BABA stock has been up seven out of the last eight days, rising nearly 10.5% in just that time frame alone. To say too far, too fast is an understatement.
I look for BABA too cool off and return towards the $100 level in the next few weeks.
Alibaba did convincingly break out above the $98.50 critical resistance level at the gap area, which it had struggled to do in mid August.
But the move higher was just a little too explosive to be long lasting.
Click to Enlarge With 105-plus million shares sold short, certainly some of the move higher once resistance was breached is likely attributable to short covering. Famed short seller Jim Chanos is one of those shorts, pointing to issues with accounting practices at Alibaba as his thesis for taking a short position in BABA.
From a technical perspective, BABA stock is at overbought readings that have signaled significant tops in the past. The 14-day RSI now stands at well over 80, so some short-term consolidation may certainly be in the offing.
Click to Enlarge From an options perspective, implied volatility (IV) is signaling a high degree of complacency. With a reading in only the 12 percentile, option prices are most definitely on the cheap side. A comparative to the historic volatility (HV) perspective of 51% shows just how cheap option prices (IV) are in comparison to the stock movement (HV).
Option skew, which measures the difference in prices for out-of-the-money calls versus puts, also is indicating extreme levels of bullishness. Normally, out-of-the-money puts trade at a significant premium to similarly positioned out-of-the-money calls. But in the case of BABA options, that metric has flipped, with the calls trading at a premium to the puts.
This is just another sign that things may be a little too hot to handle in Alibaba.
In my previous post on BABA, I touched on the valuation concerns regarding BABA stock. While certainly some of the move higher following a stellar earnings report was justified, the recent leg up has pushed the price-to-earnings multiple to the highest level of the year.
So to position for a pullback in BABA stock, I am using a defined risk put calendar trade. This is similar to the trade structure I used effectively in my previous BABA post.
Trade Idea for BABA Stock
Buy to open BABA Sept $102 puts and sell to open BABA Sept 9 $102 puts for a 70-cent net debit.
This is a one-week wonder trade, with ideally BABA stock moving towards the $102 level by this Friday. Maximum risk on the trade is $70 per spread.
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.
