Chinese search engine giant Alibaba Group Holding Ltd (BABA) is set to take the stage for its first quarterly earnings report as a publicly traded company in the U.S.
BABA stock went public back in September, and the shares have enjoyed a fair amount of success despite poor market conditions. But Wall Street is a bit nervous about this newcomer, and investor sentiment heading into the event is mixed.
Diving into the numbers, the consensus is anticipating a profit of 45 cents per share from Alibaba. The company has no earnings history as a publicly traded company, but, according to previous Yahoo! quarterly reports, Alibaba has seen strong growth so far this year. The analyst community is siding with the bulls on the front, with WhisperNumber.com reporting a third-quarter whisper number of 57 cents per share for Alibaba.
Bullish sentiment is pervasive within the brokerage community, as Thomson/First Call data reveals that 10 of the 12 analysts following BABA stock rate it a “buy” or better, with nary a “sell” to be found. That said, the 12-month price target of $112 is a bit on the conservative side, representing a premium of only about 13% to yesterday’s close at $98.73.
On the other hand, the bears have taken hold of short-term sentiment in the options pits. The November put/call ratio for BABA stock arrives at 0.89, with puts in near parity with calls among options set to expire within the next month. What’s more, this ratio rises significantly to 1.65 when we zero in on weekly November options (set to expire on Nov. 8). In other words, short-term options speculators appear to be looking for protection ahead of next week’s earnings report.
Click to Enlarge Overall, weekly November implieds are pricing in a healthy post-earnings move of about 7.3% for Alibaba stock. This places the upper bound near $106.24, while the lower bound rests at $91.76.
With BABA hovering just below the century mark, an upside breakout would be a coup for the bulls, removing a critical short-term hurdle for the stock, and creating a potential floor of support at $100. A break to the downside, while disappointing, would still leave BABA with support at $90 and its 20-day moving average.
2 Options Trades on BABA Stock
Bull Call Spreads: Those looking to side with the analyst community heading into next week’s report might want to consider a Nov $99/$105 bull call spread. At last check, this spread was offered at $2.25, or $225 per pair of contracts. Breakeven lies at $101.25, while a maximum profit of $2.75, or $275 per pair of contracts, is possible if BABA stock closes at or above $105 when November options expire.
Selling Puts: Alternately, those less bullish traders might want to consider a put sell position as a way to take advantage of BABA’s technical support. Along those lines, a weekly Nov $87 put sell (which expires at the end of next week) might be a way to capitalize on such support. After the close last night, the weekly Nov. 87 put was bid at $40 cents, or $40 per contract. On the upside, this strategy allows you to keep the premium as long as Alibaba stock closes above $87 when November options expire. The downside is that should BABA trade below $87 ahead of expiration, you could be assigned 100 shares for each Nov. 87 put sold at a cost of $87 per share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.