Reassuring buys from notable investors and analysts are popular these days in China-based tech giant Alibaba Group Holding Ltd (NYSE:BABA). But with earnings out later this week, rather than riding coattails, hit the buy button to outperform the pros with a simple but effective bull call spread in BABA stock. Let me explain.
Alibaba, called Asia’s Amazon.com, Inc. (NASDAQ:AMZN), is set to report Thursday night after the close of trade. And expectations are high if we’re to simply look and marvel at the who’s who of hedge funds that have established new stakes in Alibaba over the last quarter.
Daniel Loeb’s Third Point appears the most eager in buying a sizable 4.5 million shares of BABA, followed by David Tepper’s Appaloosa Management with an Alibaba stock position of 3.7 million shares. But it’s not just the funds that are seeing upside for BABA stock.
MKM Partners analyst Rob Sanderson came out Monday offering a call of 15% upside in BABA stock based in part of the expectation of strong online consumption trends in China following June’s massively bullish guidance from Alibaba.
MKM does caveat their bullishness by musing whether earnings results will prove enough in the short-term to satisfy investors and that many are “hoping for an opportunity to buy the stock on any pullback.” I wonder if that includes a very quiet Jim Chanos of Kynikos Associates, a notorious short-seller and critic of Alibaba in 2016?
Personally, if I were in his shoes, I’d respect that trends like Alibaba’s can persist for much longer than most give them credit for or run the risk of ruin.
BABA Stock Weekly Chart
When I last discussed BABA stock on July 3, shares were constructively digesting a massive confirmation thrust for May’s breakout from a 2.5-year cup base. The three-week long consolidation pattern wasn’t perfect, but as anticipated, overbought conditions provided more of the same and our favorable technical takeaway for additional upside on Alibaba shares was rewarded.
Currently and with shares about 10% higher, another multiweek consolidation in BABA stock has emerged. On this occasion, secondary indicators are mixed and perhaps less of a threat.
Moreover, based on the size of the cup-shaped breakout and a bullish trend much shorter in duration than its U.S.-based bedfellow, the sky isn’t the limit, but the trend still looks friendly and pointing higher for Alibaba.
BABA Stock Bull Call Spread
Given our bullish view that BABA stock will rally, one way to beat the pros, rather than ride their coattails, is to use an out-the-money directional-oriented call spread. By positioning with this type of spread an Alibaba trader can limit risk to a defined amount, cut down the cost of entering into a bullish position compared to other call and put strategies and reduce the unwanted impacts of time decay and volatility risk.
Reviewing Alibaba’s options, one such opportunity that’s favored is the Sep $165/$175 bull call spread priced for $1.85 with BABA stock at $154.63. It’s a simple but effective spread, though shares will need to rally to provide interim profits and ultimately move higher by about 8% to break even at expiration.
Bottom line, with this vertical also cutting down risk to 1.2% on an equivalent BABA stock position, offering a max return of $8.15 and plenty of time of the calendar to get bullish traders past Alibaba’s history of mixed earnings reactions — the trend looks that much friendlier up or down.
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 and feel free to click here to learn more about how to design better positions using options!
