JD.Com Inc(ADR) (NASDAQ:JD) is the second largest e-merchandiser in China, behind only Alibaba Group Holding Ltd (NYSE:BABA). But it’s still a wildly successful e-tailer, despite what the company’s second-quarter report and subsequent 6% dip in JD stock would indicate. While it felt harsh, shares still are up more than 60% year-to-date.
Fundamentally JD.com’s growth trajectory is impressive. That’s why Wall Street chased its stock all the way to a doubler after the 2016 presidential election.
Unfortunately, what goes up this fast often comes down just as hastily.
Therein lies the curse of momentum stocks. On the way up, they seem ready for a correction at any moment. On the way down, they look like abysses. In either case, traders are often kept out scared of trading them altogether. This time it’s no different for JD stock considering that Alibaba rallied 5% on the same day that JD.com fell 6%.
Alibaba’s price-to-earnings ratio is more than 60, which is expensive, but at least it runs a profit. JD.com still bleeds red ink, so it has yet to truly prove itself. Wall Street punished the company for it on Thursday, not forgiving a slight miss on earnings.
It’s unusual to punish a growth stock for missing margins. That’s what they do — they temporarily sacrifice profitability for growth! Still, not every company will get the leeway Amazon.com, Inc. (NASDAQ:AMZN) gets, especially near all-time highs in the equity markets.
Click to EnlargeThe 6% dip in JD stock makes for a total drop of 15% in less than two weeks, and on increasing volume. Usually this indicates there’s even more downside to go. But I think America’s political headlines exacerbated the recent move, and that the selling more than likely is over done.
I do have to note the open gap below $38 per share. If prices migrate toward that, the bears might try to fill it.
Having said that, I am by no means simply buying JD shares and hoping they rally back. I’m using the options pits to create income from what others fear.
How to Trade JD Stock
The bet: Sell the $35 put for $1.10 per contract. Here, I have an 80% theoretical chance that JD will stay above my strike so I can bank maximum gains. Otherwise, I would own the shares and could begin suffering losses below $33.90.
Traders who want to mitigate the open-ended risk that comes with selling naked puts can sell spreads instead. This is important especially in an American depository receipt (ADR) from China. There is a risk that JD is putting out suspect reports … but for price action purposes, and absent that headline, I trade JD.com’s reports at face value.
The alternate bet: Sell the $35/$34 credit put spread, where I have about the same odds of winning, but with much smaller money at risk. In short, I’m just putting up the money for the options spread, not the money to buy JD stock outright. The spread, if it wins, will deliver 10% in yield.
Investing in the stock market doesn’t come with guaranteed results, so never risk more than you can afford to lose.
Nicolas Chahine is the managing director of SellSpreads.com, where you can learn how to generate income from options. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @racernic and StockTwits at @racernic.