The market continues to trade in an erratic and volatile fashion as key support areas continue to hold the market from moving lower. In addition, many sessions have seen new all-times highs being reached over the last several weeks. This is also true of many stocks, including Alibaba Group Holding Ltd (NYSE:BABA). And today I have a trade in mind for BABA stock that depends on Wall Street holding it aloft.
What makes options great, in my opinion, is the ability to profit in any type of market, including sideways action.
BABA is often compared to other companies like Amazon.com, Inc. (NASDAQ:AMZN), and for good reason. As Joseph Hargett points out in his latest article, AMZN was the big story in the retail sector yesterday with its Prime Day. But comparing last year’s numbers, Amazon could not hold a candle to Alibaba’s sales, which were almost $18 billion for their one-day sales event.
He also pointed out that BABA stock traders purchased a big amount of call options on Tuesday, which is a bullish strategy on the stock.
It is nice to have a bullish sentiment on Alibaba, especially for the trade idea listed below, but I also like what the technicals are telling me. Take a look at the three-month daily chart below.
After gapping higher on June 8, BABA stock has pretty much traded in a range over the past month. The $145 area seems to have been keeping the stock from moving higher until Wednesday. After closing above that level on Tuesday, Wednesday’s bullish market pushed the stock even higher.
Now what I am looking at is for that previous resistance level at around $145 to now be support and keep the stock from moving lower in case it tries.
Let’s look at the trade.
An Option Strategy for BABA Stock
The Trade: Sell the Jul $145 put and buy the Jul $140 put for a credit of 70 cents or more.
The Strategy: The maximum potential profit for this trade is 70 cents ($70 in real terms) if Alibaba shares are trading at or above $145 at July expiration (July 21). Both put options would expire worthless.
The maximum loss is $4.30 ($430 in real terms) ($5 – $0.70). This would occur if BABA is trading at or below $140 at Jul expiration. Breakeven is $144.30 at expiration based on a credit of $0.70.
I use heavy amounts of support and resistance analysis in my option trading. Generally, when resistance has been broken because the underlying has traded above that level, it now becomes potential support. Knowing that support and resistance hold more times than it is broken (witnessed from many attempts by Alibaba to move past the $145 level), the odds may be on the side for this trade. This may be a moot point if BABA stock continues to move higher.
Consider it to be a bearish sign if the stock closes below that new potential support area at $145. A profit is made if the options expire worthless or the spread is bought back for less than it was sold.
John Kmiecik is the head options instructor for Market Taker Mentoring, and co-author of the eBook 3 Secrets to Making Money in Any Market. Get your complimentary copy of his option trading eBook here. He can be reached at firstname.lastname@example.org. As of this writing, he did not hold a position in any of the aforementioned securities.