More than a few analysts these days are suggesting it’s time to shop-the-drop in JD.com, Inc(ADR) (NASDAQ:JD). But in this strategist’s view, the better deal for a questionable JD stock is a fully-hedged, modified fence for bullish, risk-averse investors. Let me explain.
It’s human nature to be attracted to bargains. And right now JD.com or what we might call China’s ‘other’ Amazon.com, Inc. (NASDAQ:AMZN) is teasing more than a few bulls with just that sort of invitation.
Truthfully, it’s hard to blame the bullish consensus. For one, JD stock is on pace to be down for a third straight month while peeling off 25% of its market capitalization from its August high. Yikes!
To put additional perspective on the sell-off, Alibaba Group Holding Ltd (NYSE:BABA), the larger and more well-known overseas version of Amazon for investors here in the U.S., is up about 13% over the same time frame. So maybe bulls have good reason to grumble, especially given a lack of meaningful news to account for JD stock’s continued price decline?
Possibly adding salt to the wound, JD.com has also put together strategic advantages that sound impressive. The retailer has forged key partnerships, built an asset-focused business model and pursued ambitious investment in a vast distribution network and logistics businesses. Heck, JD.com has even invested in delivery drones in an effort to capture market share in China’s prized and ballooning middle class demographic.
It sounds like the bears are obviously mistaking JD.com for some lesser company, right? Maybe. As InvestorPlace’s Laura Hoy recently noted, some of those same initiatives could also backfire. JD stock has also yet to turn a dime. Of course, a lack of profits didn’t translate into poor returns for AMZN stock for the longest time.
Nevertheless, while JD stock sports a price decline that could have growth traders seeing value; for others the conditions suggest additional ‘stock’ merchandise is going to be returned.
JD Stock Daily Price Chart
Click to EnlargeAs mentioned earlier, JD stock has witnessed a healthy size correction of 25%, which for many traders equates to picking up a growth story at a discount. That’s the bull case, as are the various Fibonacci supports, a nearby bullish price gap from May and a potential “we-gotcha-breach” of the 200-day simple moving average often used to flush out weaker bulls before reversing higher.
However, the bears have laid down some tracks on the chart that can’t be altogether ignored. By our reckoning, JD stock has confirmed a slightly irregular head-and-shoulders formation. There has also been plenty of volume to support a bearish bias. Further, if I was to estimate a pattern-based measured move price target, shares of JD.com could be headed for $30 before finding a bottom.
JD Stock: Bullish Modified Fence
Click to EnlargeGiven the possibility for a larger move up or down and mixed evidence off and on the price chart, if investors are confident of JD stock and see themselves as buyers at even lower prices, a bullish modified fence is a favored strategy.
With this type spread combination, the investor ditches owning JD.com shares and simply buys a call vertical spread and sells a bull put vertical in the same month.
This variation of the fence maintains limited risk and it can typically be structured for no cost or a slight credit. In turn, this sort of combination typically allows the investor to own, for free or better, a bullish call spread for upside potential.
And on the downside? Worse case, if the out-of-the-money put spread goes fully in-the-money, by some measures there’s a loss to acknowledge that’s as large as the distance between the put strikes. However, and by some other investors’ rules of engagement, there also exists a below-market spot to begin accumulating JD stock.
Disclosure: Investment accounts under Christopher Tyler’s management do not currently own positions in any securities 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 and StockTwits and feel free to click here to learn more about how to design better positions using options!