You’ve certainly heard it before, but on this occasion, the bullish “echo” is for the massive disruptor Alibaba Group Holding Ltd (NYSE:BABA). And for investors interested in riding BABA stock long, I’ve said it once and I’ll say it again — a modified bullish fence speaks loud and clear to this strategist. Let me explain.
Dominance in online retailing and a growing force in cloud computing, data management and technology, as well as entertainment — does that sound familiar? Of course, I’m talking about Amazon.com, Inc. (NASDAQ:AMZN), right?
I certainly could be, but not when it comes to Asian markets.
Overseas, the same type of domination and conquering of similar markets Amazon shows is on full display at China-based Alibaba. It’s a place where the company has successfully taken on Amazon’s role as the 800 lb. gorilla, with business tenterhooks seemingly everywhere.
The proof of Alibaba’s power was even more evident at the company’s annual investor day earlier this month when management revealed full-year revenue growth of 45% to 49% for BABA stock worthy of eliciting “gasps of wow” from attendees.
Now in another move that’s sure to keep BABA stock on investors’ wish lists and many others hitting the ‘buy now’ button, Alibaba is about to echo, for lack of a better word, Amazon’s wildly popular Echo home information and entertainment device. Hmm. “Alexa, buy me BABA stock!”
BABA Stock Weekly Chart
When I last discussed BABA stock on June 14, it was on the heels of a Rodney Dangerfield moment for broker Raymond James.
That day, a bullish and above-market price target revision from $160 to $190 fell on deaf ears and anxious fingers as shares of Alibaba fell on the session. Raymond James has yet to have the last laugh, but in our technical view, BABA continues to set up nicely for bulls.
Over the past three weeks, BABA stock has established an inside consolidation pattern following an explosive confirmation for its recent breakout from a massive 2.5-year cup-shaped base.
Is the price action perfect? No, and BABA stock still looks somewhat overbought based on stochastics and price in relation to the upper Bollinger Band. More to the point stock charts aren’t supposed to be perfect and over the last couple weeks shares of Alibaba have provided a constructive consolidation and the type of action I had hoped to see.
BABA Stock Modified Bullish Fence
Ironically enough, I could point to Alibaba as a situation of “ask and you shall receive” based on what has transpired on the price chart in BABA stock. Now if I asked my Echo, “How can I position in shares of BABA using options?” I’m likely to come up empty-handed.
The good news is I have an answer to that question.
In reviewing Alibaba’s calls and puts, a modified fence, which served us well in our last write-up, sounds good for a second time — almost like an echo. Specifically and with BABA stock at $140.90, combining the Aug $135/$130 put credit spread with the Aug $145/$150 bull call vertical is priced for a debit of 40 cents and looks attractive.
What does this spread combination offer bullish BABA stock traders, without necessarily having to buy shares? First, if Alibaba declines in price the trader is positioned to buy shares, if they’re inclined to do so, for $135.40. That’s a margin of safety of nearly 4%.
Further, because risk is fully contained by the purchased $130 put, picking up shares at a much larger discount is possible if BABA stock tanks in price below the vertical. And with Alibaba’s earnings in early August, that type of protection, for better or for worse, is definitely handy to have in place.
At expiration, if BABA stock is between $135 and $145, the spreads go out worthless and the trader would forfeit the small debit of 40 cents. However, if shares begin to rally with time still left on the clock, there is the opportunity for profits to begin accruing, as the strategy is long deltas.
What if Alibaba begins to take off again? The owned and low-cost $145/$150 bull call spread can quickly build up real, intrinsic value and nice-size profits if shares merely get back to the recent highs at expiration. And in a perfect world, BABA stock will fly to slightly higher highs, remain above $150 into expiration and offer spread traders an outsized and maximum profit of $4.60.
Investment accounts under Christopher Tyler’s management do not currently own positions in any securities 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 and StockTwits.
