I usually restrict my trading to U.S.-centric companies but Alibaba Group Holding Ltd (NYSE:BABA) is one my exceptions. I’ve previously shared a setup that delivered free profits with no out-of-pocket expense, and BABA stock looks good for another trade following its recent earnings report.
What’s really encouraging is how, despite some early turmoil, Alibaba shares managed to close higher. That was a bullish statement.
I’m not one to chase stocks near all-time highs, but I’d at least consider if I have visibility on proper support levels that coincide with my perceived value for the company. So even after such a sharp consistent rise, I’m still willing to deploy bullish risk at these levels for a trade.
Fundamentally, BABA stock is not cheap … but relative to its competitors, it’s not expensive either. Alibaba consistently delivers impressive growth with nice profitability thanks not just to its core e-commerce business, but a host of additional growing arms in finance, media and the cloud. Add to this a sprinkle of financial engineering in the form of buybacks, and you’ve got yourself a fundamentally attractive equity.
In fact, it’s attractive to a fault — analysts’ expectations for Alibaba are so high, there’s a lot of room for disappointment via surprise downgrades.
BABA stock trades at $121 per share — not an ideal entry point, but corrections are few and far between. Even Thursday’s dip lasted mere hours, and now the stock is back above the trend. It’s clear that if I want to participate in Alibaba’s upside, I have to go chasing.
Armed with reassurance from the earnings, I am brave enough to sell risk against proven support level. The goal here is to generate income from the price action in Alibaba stock without risking any out of pocket money. To overcome the hurdle of my conservative nature, I will use the options market.
How to Trade BABA Stock Right Now
I don’t want to risk $121 buying BABA shares at face value with no room for error. But I am willing to own it at a lower price. I can use this fact to generate income out of thin air. The trick is to find the proper levels.
Click to Enlarge The chart tells me that buyers use consolidation zones between rallies to build momentum. I can see two such zones that I can use. The first is around $107.50, but the better one is $5 lower. A 15% buffer zone makes me a much braver trader.
The Bet: Sell the Jul $105 put for $1 per contract. This is a bullish trade with a 85% theoretical certainty that I will be able to retain my maximum gains. If BABA stock dips below $104 per share, I’ll start to accrue losses.
If I am unable or unwilling to own shares, I should use spreads instead.
Selling options is risky business, so don’t ever risk more than you’re willing to lose.
Learn how to generate income from options here. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @racernic and stocktwits at @racernic.