Spring has arrived and Alibaba Group Holding Ltd (NYSE:BABA) has turned a new leaf. The bear hibernating in BABA’s den has finally departed, allowing the Chinese giant to halt its harrowing descent.
Our last foray into the stock bore fruit and I see little reason why we shouldn’t re-up the bet here. The case for a bullish play is even stronger now than it was then.
But first, let’s review the aforementioned positive developments:
- Accumulation days are on the rise. We’ve seen no less than seven higher-than-average volume up days since March. This marks a decisive change in character for BABA stock as it had virtually no accumulation days during its three-month downtrend.
- Trend structure has improved dramatically. Alibaba stock has carved out a series of equal pivot lows, which has flattened out its trend and created a base that it can now launch higher from.
- Today’s up-gap has taken BABA stock above its 50-day moving average for the first time in months. When stocks that have heretofore been unable to break resistance all of a sudden sail through them with ease, bulls should take note.
Bottom-Fishing BABA with Options
Traders looking to profit from continued strength out of BABA could sell May put spreads. I typically suggest selling far out-of-the-money options to increase the probability of profit, but in this case I’ll throw out something a bit more aggressive for those looking for higher profits if BABA cooperates.
Sell the May $85/$80 put spread for $1.50 credit. The maximum reward is limited to the $1.50 credit and will be captured if Alibaba stock remains above $85, which it should if this breakout is legit.
The maximum risk is limited to the distance between strikes minus the net credit, or $3.50, and will be lost if BABA falls back below $80.
With today’s up-gap getting sold into, it may be worthwhile to wait for a pullback in BABA before pulling the trigger on the spread.
At the time of this writing Tyler Craig had no positions on any of the aforementioned securities.