Alibaba Group Holding Ltd (NYSE:BABA) has seen its shares lift higher the past couple weeks. And based on what we’re continuing to see both off and on the BABA price chart, that outperformance isn’t finished and supports positioning with a “counterfeit” butterfly spread of sorts. Let me explain.
In less than a handful of days Donald Trump will be President of the United States. As his Presidency begins, we’ll quickly have a better idea of which campaign and post-election promises turn into reality. But what’s that have to do with Alibaba and BABA stock?
One spot that could see some political fireworks are words aimed at “CHI-na,” or the country pronounced “China” to other English-speaking U.S. citizens. It’s no secret the President-elect has not been a fan of the world’s second largest economy and BABA is one of China’s 800 lb. gorillas.
Most recently, comments made late Friday accuse “CHI-na” of “currency management practices” that promotes a weaker yuan, and in turn a stronger dollar, which makes U.S. goods uncompetitive. That means more for BABA stock than you probably realize — as a bullish investment.
The fact of the matter is, once Trump begins negotiating “great trade deals” with China, he may turn to his “new” cozy ally and Alibaba CEO Jack Ma who recently proposed 1 million jobs in five years in the U.S. Of course, you and I both know Jack isn’t coming to the negotiation table to save the manatees.
Secondly, and counterfeit concerns aside, the massive online retailer stands to benefit if Trump gets what he wants, namely a weaker dollar. If the foreign exchange relationship does reverse direction, this helps a China ADR like BABA as Renminbi-based profits are translated into the U.S. denominated ADR.
Lastly, given a BABA price chart that continues to look supportive, Alibaba looks to trump any other potential negatives such as the company’s spending on content acquisition or recent investor disappointment Alibaba didn’t guide higher following a strong Singles’ Day.
BABA Stock Daily Chart
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This strategist was a bit early in BABA, but the low end of the support range did hold to confirm the uptrend. An outlined, low-risk and positioned long butterfly has also gained 400% in moving from 25 cents to $1.25 over the past month.
Currently and with Alibaba stock near $95.50, BABA is positioned within a small bull-flag pattern that’s established itself above all key moving averages. As much and with earnings next week, the expectation is for an upside breakout.
BABA Stock Bullish Modified Butterfly Spread
Considering how well last month’s positioned butterfly worked out, it would be interesting to try a similar trade. However, with earnings on the table and the potential for more exaggerated price movement in BABA, both positive and negative — using a wider and modified spread that allows for a larger profit range makes sense.
Reviewing Alibaba’s options, the 03 Feb $100/$104/$107 long butterfly is attractive. Priced for 50 cents with BABA at $95.65 this positioned and modified spread is bullish with a max payout of $3.52 at expiration if shares landed squarely on the middle, sold $104 call.
The most that can be lost is the smallish debit paid if BABA remains below $100 at expiration. The real bonus with this butterfly is if shares overshoot the upper $107 call strike the trader still has a profit of 50 cents or return of 100%.
Unlike a traditional and symmetrical butterfly which incorporates two contrasting verticals of the same width, this BABA butterfly’s $104/$107 bear call spread is tighter than the lower bull vertical. Net, net, this butterfly is a bit of a counterfeit in its own right, but it looks like the real deal as a way to position more smartly.
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 Christopher Tyler’s 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.
