While I remain a long-term bull on Alibaba Group Holding Ltd (NYSE:BABA), it is time once again to ride a pullback in the shares. BABA stock is butting up against technical resistance, and geopolitical tensions on the Korean Peninsula gave grown into notable short-term detractors. The situation offers a perfect opportunity to profit from a controlled pullback, or add BABA stock to your portfolio.
First, let’s take a look at the short-term risks. Most notably, rhetoric between Pyongyang and Washington ratcheted up a notch this week. In his first speech at the U.N., President Donald Trump bad-mouthed North Korean President Kim Jong-un and promised that he would “totally destroy” North Korea if Pyongyang provoked the U.S. or its allies.
In response, Kim Jong-un engaged in his own name-calling with Trump, and North Korea threatened to test a hydrogen bomb over the Pacific Ocean. Proof that the North actually has an H-bomb could drastically affect negotiations on the Korean Peninsula, creating fear in global and Chinese markets and negatively impacting Alibaba’s bottom line.
The vast majority of Alibaba’s revenue comes from Chinese and Southeast Asian markets, including South Korea.
Alibaba Stock Chart
Click to Enlarge Turning to the technical backdrop, BABA stock’s price action has been strong of late, but the shares have run into technical resistance at the round-number $180 level at the wrong time. Sentiment is shifting short-term bearish due to rising geopolitical tensions, and traders will be less likely to push BABA stock into all-time-high territory as a result.
That leaves BABA stock to consolidate once again, with support emerging in the $170-$175 region. If worse comes to worse, BABA could even retest support at its rising 50-day moving average near $163.
Any pullback in BABA stock should be seen as a buying opportunity, given the company’s massive upside potential over the next year or two.
Options traders who followed my advice last month already know that trading short-term dips in BABA stock can be profitable. In fact, the Sep $170/$175 bear put spread from my Aug 25 article hit its maximum potential return of 85% just four days later.
Traders looking to buy BABA stock at a discount were also able to realize that opportunity if they exercised their sold Sept $170 put at the same time.
Looking ahead to October options, BABA stock is in a similar situation, and, once again, the strategies to capitalize on this short-term weakness remain the same.
2 Trades for BABA Stock
Put Sell: If you missed out on adding BABA stock to your portfolio amid this run-up, and you’d like to pick the shares up at a discount to their recent highs, an Oct $175 put sell should give you that opportunity. At last check, this put was bid at $3.45, or $345 per contract.
Remember, you are selling this put not just to pocket the premium, but also as a way to name your price on the shares. If BABA stock trades below $175 before October expiration, the put could be exercised and you can buy BABA for $175 while keeping the initial premium.
If BABA stock doesn’t trade below $175 by the time October options expire, or if the contract isn’t exercised, you can keep the premium and roll your target out to the next contract month and try again. The downside is that it’s possible that BABA will never trade below $175, leaving you sans the shares, but still banking the premium for selling the options.
Put Spread: For those not looking to own BABA, but, rather, looking to capitalize on the stock’s short-term weakness, an Oct $175/$172.50 bear put spread has the potential to do just that. At last check, this spread was offered at 85 cents, or $85 per pair contracts. Breakeven lies at $174.15, while a maximum profit of $1.65, or $165 per pair of contracts — a 40% return — is possible if BABA stock closes at or below $172.50 when October options expire.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
