Alibaba Group Holding Ltd (NYSE:BABA) scored a much-needed victory with its early May earnings announcement.
BABA vaulted 11% on the initial earnings gap and has spent the past two weeks consolidating in a tight range.
I find it very compelling that BABA has been able to hold onto its earnings gains so well. Previous rally attempts in the Chinese e-commerce company have been rebuffed in short order.
Not this time — smells like a constructive change in character.
The tight base formed over the past few weeks provides just the type of high-quality setup that technicians look for. A breakout over the $89 resistance zone should spark a renewed advance in the stock.
On the derivatives front, BABA options are being offered at bargain prices. Implied volatility just tagged a new all-time low at 22%. During Alibaba stock’s post-IPO run implied volatility was running in the mid-40s, so option premiums have essentially been cut in half since then.
With BABA options now relegated to the bargain bin, long premium plays are perhaps the best choice to exploit the coming breakout in the stock.
Grab BABA Call Options on the Cheap
Consider the following two plays — one aggressive and one conservative.
Aggressive traders could buy the Jul $87.50 call option for $3.70. The maximum risk is limited to the initial $3.70 debit and will be lost if BABA falls below $87.50 by expiration. The maximum reward is unlimited.
Conservative traders could buy the Jul $87.50/$92.50 call spread for $2.14. The maximum risk is limited to the initial $2.14 debit and will be lost if BABA sits below $87.50 at expiration. The maximum reward is limited to the distance between strikes minus the net debit, or $2.86, and will be captured if BABA stock can rise above $92.50.
At the time of this writing Tyler Craig had no positions in any of the aforementioned securities.
