Yesterday was the worst down day of the year for Alibaba Group Holding Ltd (NYSE:BABA) as BABA stock dropped $8.50, or nearly 5%. After making an all-time high last week at $180.87, shares have generally fallen, with the loss totaling over 6%. While the momentum may be broken for now after the recent drubbing, I look for BABA stock to consolidate and staunch the bleeding around current levels.
![Don't Say Bye Bye to Alibaba Group Holding Ltd (BABA) Stock, Say Buy Buy](https://investorplace.com/wp-content/plugins/lazy-load/images/1x1.trans.gif)
Like the majority of the momentum darlings, Alibaba trades more on technicals than fundamentals. BABA stock is fast approaching major technical support at the $165 level. This is the post-earnings-gap area, and earnings gaps normally provide solid support.
Nine-day RSI is also at the most oversold reading since earnings on Aug. 17 while implied volatility (IV) is at the highest levels in that same time period. BABA stock is looking attractive on a technical analysis basis.
Click to Enlarge While fundamentals don’t have as great an impact on growth stocks like BABA as they on more value-oriented names, fundamentals still matter. Alibaba is now trading back below a 60 price-to-earnings multiple for the first time since the recent lows of Sept. 8.
It is important to remember that BABA did beat earnings convincingly on both the top and bottom line, as InvestorPlace contributor Vince Martin aptly noted. So with Alibaba trading back towards pre-earnings level, I look for shares to find solid support.
In my previous post on Alibaba from Aug. 30, I proposed a bullish put credit spread play to profit from a consolidation following a sharp drop in Alibaba stock over a four day period. While the previous article followed a 7% drop, the current drop of 11% in a similar four day time frame provides for an even more powerful trade set up. The previous trade idea proved to be a winner, so I would expect the following trade idea to follow suit and be a winner as well.
BABA Trade Idea
Buy BABA Oct $157.50 puts and sell BABA Oct $160 puts for a 45-cent net credit.
Maximum gain on the trade is $45 per spread with maximum risk of $205 per spread. Return on risk is 21.95%. The short $160 strike price is well below the major support area of $165 and provides a 5.66% downside cushion to the $169.59 closing price of BABA stock.
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 timbiggam@gmail.com.