Alibaba Group Holding Ltd (BABA) Stock Making You Money By Holding Steady

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With the market seemingly now slowing down at least at this point, option traders have had numerous bullish opportunities to profit. What is nice about trading options is that there are strategies to profit even if the stock does not move in the desired direction. Take a look at Alibaba Group Holding Ltd (NYSE:BABA). The company is often said to be the Chinese counterpart to Amazon.com, Inc. (NASDAQ:AMZN).

Alibaba Group Holding Ltd (BABA) Stock Making You Money By Holding Steady

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Just recently, Vince Martin wrote about seven stocks that he thought would set new record highs in 2017. Included in this group was Alibaba. He mentioned he liked the stock because of its dominance in the Chinese market and the potential to expand their market opportunities through their commercial cloud business.

In addition, I see a new opportunity based on what I saw in United Continental Holdings Inc (NYSE:UAL) just last week. The stock looks like it wants to move higher but some resistance keeps it from accomplishing, that at least at the moment. Time for another vertical credit spread?

The Alibaba Trade Setup

The Rationale: Taking a look at the 6-month chart below, BABA has been trading in a range between about $100 and about $104 since the end of January after rallying through its 200-day SMA at the beginning of 2017.


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Although BABA stock has not been able to move decisively through the $104 level in 2017 as of yet, every time that is has dropped to around $100 since moving up to that level, the stock has been able to surge higher once again.

For Vince to be right, eventually resistance at $104 will need to be broken. A trader who is long the stock may be frustrated with this scenario but an option trader can take advantage of this dilemma — see below.

How to Trade BABA Stock

The Trade: Sell the BABA Mar $97/$100 put credit spread (selling the Mar $100 put and buying the Mar $97 put) for 30 cents or better.

The Strategy: The maximum potential profit for this trade is 30 cents ($30 per spread in real terms) if Alibaba is trading at or above $100 at the expiration. The maximum loss is $2.70 ($3 minus 30 cents) or whatever credit was received for the spread if BABA stock is trading at or below $97 at Mar expiration. Breakeven is $99.70 at expiration based on a 30-cent credit.

The implied volatility of BABA options is currently above historical levels. In this regard, an option trader is selling premium as part of a spread in this instance, above normal levels. Option traders prefer to buy premium when IV is lower than HV and sell premium when it is higher. Consider it to be a bearish sign if BABA stock closes below $100, something it has not done since trading above that level.

John Kmiecik is the head options instructor for Market Taker Mentoring, and co-author of the eBook 3 Secrets to Making Money in Any Market. Get your complimentary copy of his option trading eBook here. He can be reached at john@markettaker.com. As of this writing, he did not own a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2017/03/alibaba-group-holding-ltd-baba-stock-steady/.

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