Ride Alibaba Group Holding Ltd (BABA) Stock Without Paying a Penny

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BABA stock - Ride Alibaba Group Holding Ltd (BABA) Stock Without Paying a Penny

Source: Charles Chan Via Flickr

I’ve said it before and I’ll say it again, I may not know anything about the financial intricacies of the massive, foreign enterprise Alibaba Group Holding Ltd (NYSE:BABA), but I do know price action and options strategies.

Ride Alibaba Group Holding Ltd (BABA) Stock Without Paying a Penny
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Considering the most recent findings off and on the BABA stock chart, it’s time for investors to consider a bullish spread combination. Let me explain.

Tuesday has to feel a bit like a Rodney Dangerfield moment for analysts at Raymond James. The firm raised its above market price target on BABA stock from $160 to $190. And with shares of CEO Jack Ma’s Chinese-based technology giant at $137, the expected return is a hefty 39%. Nice! But wait there’s more!

The call also reiterated a “strong buy” on shares noting support from Alibaba’s recent analyst day. Among other items, higher sales growth of 45% to 49% is expected. For their part, Raymond James is growing more confident in the company’s cloud business and BABA stock’s stronger margins. Nice, again! But unfortunately there’s more to tell.

At the end of the day, there was very little respect, much like for our deceased friend Rodney, for the bullish revision. After a brief gap bid in the early going and despite the Nasdaq Composite holding favor with bulls, the price tag of $137 actually represented a loss on the day of -1.50% in BABA stock. No respect, I tell ya!

So, where’s this leave BABA stock, besides at $137? In our estimation, in favorable position for a modified fence strategy based on solid prospects off the chart, some appreciation for Tuesday’s analyst dismissal, as well as a bit of respect for BABA’s price chart.

BABA Stock Weekly Chart


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Source: Charts by TradingView

Shares of Alibaba are up roughly 55% after bursting higher last week and following a somewhat volatile breakout from a 2.5-year cup-shaped base in May.

Currently, the rally may have gotten ahead of itself. This view is supported by Tuesday’s upgrade reaction, which all things considered, is disappointing.

Moreover, that may also be a byproduct of BABA stock’s large price spike through the upper Bollinger Band and overbought stochastics with a crossover signal.

Looking forward, the expectation is some combination of time or price consolidation in BABA stock is likely. However, the anticipation is the counter-trend action will be modest and another powerful leg higher is forthcoming based on the substantial pattern breakout.

BABA Stock Modified Bullish Fence

Given what’s been discussed, I like the idea of approaching BABA with the sale of an out-of-the-money put vertical spread and purchase of a bull call spread.

In a nutshell, the put spread is used to partially or fully finance the call vertical, which allows for a nice profit opportunity if shares of Alibaba reassert the bullish trend and rally through the call spread to new highs in the coming weeks.

I personally refer to the spread combination as a modified fence position. Unlike a regular fence, which merely sells a put, risk is limited due to the vertical construction. Whatever you might call the strategy, it does fit in well with our outlook for BABA stock.

Reviewing BABA’s options board and shares at $137.00, selling the 14 July $129/$124 put spread and buying the 14 July $145/$150 call spread is conservatively priced for even money and possibly a small credit.

What’s this spread accomplish? If BABA moves lower, the sold put spread means this BABA trader is positioned to buy shares for $129. As risk is limited due to the lower purchased put, the trader could conceivably buy Alibaba for a good deal cheaper if shares traded aggressively below $125.

At expiration and if BABA stock is between $129 and $145, the spread expires worthless. During the life of the position, if shares are trading higher in price than today, paper profits might begin to accrue.

Back to that second Friday in July, since the Weeklys modified fence is established for even money, the BABA position won’t result in a loss or gain if shares wind up within the two middle strikes of the combination.

And if BABA stock confirms it trend with higher prices? If shares begin to rally the trader owns the $145 / $150 bull call spread for free. North of $150 and slightly above the recent high of $148.29, the spread will expand to $5.00 and pure profit potential.

Nothing is really free of course; even for this no-cost strategy. But if you’re receptive to buying BABA on weakness with defined risk and simultaneously wish to be positioned long deltas in the event of a bullish reaction, this spread could be worth your consideration.

Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.

The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.


Article printed from InvestorPlace Media, https://investorplace.com/2017/06/ride-alibaba-group-holding-ltd-baba-stock-without-paying-a-penny/.

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