$200 Is the Top in Alibaba Group Holding Ltd Stock

Advertisement

Alibaba stock - $200 Is the Top in Alibaba Group Holding Ltd Stock

Source: Shutterstock

Shares of Alibaba Group Holding Ltd (NYSE:BABA) have been on quite a run higher lately. After bottoming at $179.76 on March 2, BABA has risen over 11% in the past 10 trading days, closing once again above the $200 level on Friday before faltering again today. I think it is definitely a case of too far, too fast for Alibaba stock. Look for BABA to pullback over the coming weeks.

In my previous article on Alibaba stock from Feb. 6, I had a positive outlook on BABA over the short term. The stock was trading at $180.53 then and I recommended a bull put spread trade, which proved to be prescient. Now that Alibaba stock has rallied back towards the all-time highs, my viewpoint has changed-because price does matter. Valuation matters as well, and Alibaba is now priced back near the highest P/E multiples seen over the past year, breaching the 50 level. This should temper any further upside in BABA.

Much of my previous bullish stance was predicated on the fact that Alibaba stock was extremely oversold and due for a bounce. In a similar fashion, my current bearish tone is based on the recent rally in BABA being overextended and due for a pullback.

Alibaba stock is certainly overbought from a technical perspective. BABA is fast approaching 70 on a 9-day RSI basis, an area that had marked significant short term tops in the past. MACD is also at extreme levels with a reading of 1.42. Previous instances when MACD breached 1.00 also were reliable indications of impending pullbacks in Alibaba.


Click to Enlarge 
A move back towards the $192 support area seems the most likely scenario over the coming weeks.

Option implied volatility (IV) in BABA options is currently at the 51st percentile. This means option prices are priced at a neutral level, favoring spread strategies. A put calendar trade structured for a pullback towards the $192 support level makes intuitive sense.

Alibaba Stock Trade Idea

Buy BABA Apr $190 put and sell BABA Apr 6 $190 put for a $1.30 net debit.

Maximum loss on the trade is $130 per spread with maximum gain realized if Alibaba stock is trading near $190 at the April 6 expiration date.

Tim may hold some of the aforementioned securities in one or more of his newsletters. Anyone interested in finding out more about Tim and his option-based strategies can go to https://marketfy.com/item/options-and-volatility/.

Tim spent 13 years as Chief Options Strategist at Man Securities in Chicago, four years as Lead Options Strategist at ThinkorSwim and three years as a Market Maker for First Options in Chicago. Tim makes weekly appearances on Bloomberg TV  “Options Insight”, Business First AM “Trader Talk”, TD Ameritade Network “Morning Trade Live” and CBOE-TV “Vol 411” to discuss everything from volatility and option related.


Article printed from InvestorPlace Media, https://investorplace.com/2018/03/200-is-the-top-in-alibaba-group-holding-ltd-stock-baba-stock/.

©2024 InvestorPlace Media, LLC