After three straight days of punishing selling, shares of Alibaba Group Holding Ltd (NYSE:BABA) may have finally found their footing. Concerns about the negative effect a new tax bill might have on tech companies was the impetus for the worst down day in three months for the NASDAQ 100. Certainly Alibaba stock wasn’t spared in the bloodbath, shedding another 3.63%.
Within every crisis comes opportunity, however, and I look for BABA to find support near current levels.
My previous article on Alibaba stock from a few days ago (Nov. 27) postulated that the rally in BABA was getting extended, which proved to be the case. A 9% pullback from the Nov. 24 close of $191.19 to yesterday’s low of $173.62 certainly can be reason to change to a more neutral stance on BABA stock.
While I am not yet bullish on Alibaba stock, my previous bearish view has tempered greatly because price ultimately does matter.
From a technical viewpoint, it is somewhat incredible how quickly Alibaba stock went from overbought to oversold in such a short time frame. The 9 day RSI is now at levels that have marked significant short-term lows in BABA stock in the past.
Alibaba also rallied to hold support at the 50-day moving average after briefly piercing it intra-day. This type of reversal pattern, with Alibaba stock bouncing $6 off the lows, is usually a good indicator that the selling may have climaxed.
The big uptick in option implied volatility (IV) is also a reliable sign that a short-term bottom may be in place. It also means that option prices have become more expensive, making selling strategies more robust. So to position for a bounce in BABA, a put credit spread is the optimal way to play.
Alibaba Stock Trade Idea
Buy the BABA Dec $170 puts and sell the BABA Dec $172.50 puts for a 40 cents net credit
The maximum gain on the trade is $40-per-spread with maximum risk if $210-per-spread. Return on risk is 19.05%.
The short $172.50 strike price is structured below the $173.62 intra-day low from yesterday and it provides a 4.11% downside cushion to the $179.91 closing price of Alibaba stock. It also is a nice offset for those who may have sold the call spread highlighted in my previous post.
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 firstname.lastname@example.org.