I don’t know “Jack” about what’s lifting shares of Alibaba Group Holding Ltd (NYSE:BABA) Monday. More to the point, confidence in BABA stock’s price chart and a lower-risk spread opportunity means an otherwise fishy situation sets up a much more promising trade for bullish investors. Let me explain.
Sometimes, in being able to live in the moment, it’s important to simply trust the price chart — on top of a longer-term underlying belief in the company you’re eyeing as an investment, of course.
That’s more or less (and mostly more) how this strategist sees BABA stock right now.
The truth is, often the market makes a significant move even before a headline-friendly catalyst arrives to RSVP traders it’s time to get in. In support of that behavior, BABA is up about 1.9% and leading a healthy bid in the iShares FTSE/Xinhau China 25 Index (ETF) (NYSEARCA:FXI).
Ironically enough, BABA and FXI are rallying in the face of challenging headlines warning of the bearish impact of a U.S. rate hike on Chinese equities and the country’s economic conundrum related to growth stabilization.
So if you’re watching a stock you’re already interested in, but wondering why on earth it’s moving today and can’t help but think, “there’s something fishy in Denmark” going on, it may just be time to act — even if you don’t know entirely what Jack Ma and Alibaba are up to as they look to expand their brand outside Asian markets.
BABA Stock Daily Chart
Back in mid-January in front of Alibaba’s earnings beat, I wrote optimistically about a nice-looking bullish flag setup in BABA stock. The chart, as it turns out, reciprocated as investors piled into shares and forcing an upward price gap.
Since the earnings reaction, shares of BABA have put together a lateral consolidation. For some, the pattern might appear to be a flat base — and for others, maybe a bullish handle within a corrective cup-shaped base. Either way and with shares of Alibaba stationed above the 62% retracement level, stochastics curling higher from oversold territory and now Monday’s heavier and above-average volume breakout, it’s all systems go for BABA stock.
Looking beyond today’s breakout signal, the next logical area of resistance for BABA is the cup high near $110. From there, if a more durable bid finds its way into shares, the all-time-high of $120 established back in November 2014 could easily find itself the target of momentum traders.
BABA Stock Bullish Modified Butterfly Spread
Given what’s been discussed, I like the idea of approaching BABA bullishly and targeting the pattern high of $110 with a shorter-term trade which expires prior to earnings. As that potential bullish driver is removed, a long modified or what might be called a “counterfeit” call butterfly spread looks well-suited for positioning.
Reviewing the BABA options board, the 13 April $106/$110/ $112 call butterfly is valued for $1.05 with shares of Alibaba trading at $105.40.
The max payout for this limited-risk spread is $2.95 if, on expiration, BABA stock lands right on the targeted $110 strike. The timing and price precision necessary should be appreciated as being a long-shot. Nonetheless a profit zone which begins at $107.05 and then proceeds to match the return of BABA stock all the way up to $110 is a nice counter to the former’s unlikely occurrence.
What’s also nice is unlike a traditional symmetrical butterfly which incorporates two contrasting verticals of the same width, this spread can’t turn into a loss if BABA stock overshoots the outer $112 call wing. In fact, because the embedded $110 / $112 bear call spread is half as wide as the $106 / $110 bull call spread, the trader keeps a guaranteed 95 cent profit above $112 after factoring in the cost of the butterfly.
Bottom line, I may not know “Jack” about the market at times and why others are doing what they’re doing. But what I can say is with this “fake or counterfeit” spread and the smallish $1.05 only at risk if BABA fails to rally — well, that looks like the real deal for bullish traders in this strategist’s view.
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.
