BABA Stock: Alibaba Group Holding Ltd is Poised For A Pullback!

Following an earnings report last week that beat on revenue but missed on earnings, shares of Alibaba Group Holding Ltd (BABA)  jumped 4% to close at $78.83. Since that time, BABA stock has basically drifted sideways, meeting some upside resistance at the $80 level.  I look for Alibaba stock to close the post-earnings gap and retrace back to the $75 level over the next few weeks.

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There is major overhead resistance looming at the $85 level in Alibaba, which should provide a formidable headwind for BABA stock moving forward. Previous attempts to pierce this level were met with strong selling.

While BABA revenues did come in better at $3.75 billion versus $3.59 billion expected, earnings of 47 cents were actually well below consensus of 60 cents. Spending increased to 60% of revenue versus 58% from a year ago, leading to the earnings shortfall. Noted short seller Jim Chanos continues to have a short position in Alibaba stock, having questions regarding the cash flows and financial metrics.

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Mr. Chanos goes on to note his bearish view on China as another reason he is short BABA. Alibaba stock is normally correlated to the iShares FTSE/Xinhua China 25 Index (ETF) (FXI), but recently that correlation has diverged, with BABA being a big out-performer. I look for that correlation to revert, a decided negative for BABA shares.

The options market is painting a very complacent picture post-earnings for BABA stock, with implied volatility (IV) at the lowest level since June of 2015. IV is normally a reliable contrarian indicator, Previous instances when IV was this low marked significant tops in Alibaba stock, as seen in the chart.

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With implied volatility at low levels, long volatility option positions are favored. With my expectation for a pullback to the first support level of $76 level over the next few weeks, a long put calendar spread is my trade structure.

Specifically, I would look to buy the BABA June $76 puts (expire 6/3/16) and sell the BABA May $76 puts (expire 5/20/16) for a 62 cents net debit. The maximum risk on the trade is $62 per spread. Maximum profit is achieved if BABA stock closes near the $76 level at May expiration. The strike selection equates to the $76 support level.

As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the Delta Desk Research Report can email Tim at

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