News of Yahoo (YHOO) holding off on plans to spin off its stake in Alibaba Group Holding (BABA) is making the rounds today.
While the development is delivering an outsized move in YHOO stock (it’s down more than 4% since gapping higher this morning), it’s the price action in BABA that’s more attractive here.
Since getting cut in half from its all-time high of $120, BABA stock has been on the mend.
As a matter of fact, the recent strength in BABA has been sufficient in reversing every trend line that has defined its downtrend since it began late last year. The uptrend that has taken root has been accompanied by both a rising 50-day and 20-day moving average, which bodes well for buyers going forward.
In light of the recent chop-fest descending on stocks, BABA has been consolidating near key short-term resistance. Price pattern enthusiasts will note a cup and handle pattern is forming, which portends an upside breakout in the near future.
The $86 price level is the threshold to watch in the days ahead. A breach of this ceiling could be just the catalyst to kick-start another advance in BABA.
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Option prices in BABA are fairly tame right now, making a long call spread relatively interesting here.
By selecting the right strike prices, we can set up a trade with the potential to double our money while minimizing the effect of time decay while we wait. Buy the Feb $82.50/$87.50 call spread for $2.50 or better. The max loss is limited to the initial $2.50 debit and will be forfeited if Alibaba stock price sits below $82.50 at expiration.
The max gain is limited to the distance between strikes minus $2.50 — or $2.50 — and will be captured if the Alibaba stock price can rise above $87.50 by expiration.
By using February options, we give BABA stock a couple months to make the necessary rise past $87.50.
In timing your entry, consider waiting for the price of BABA stock to take out the $86 resistance level before pulling the trigger. It may consolidate for a bit before the surge begins in earnest.
At the time of this writing Tyler Craig had no positions on any of the aforementioned securities.
