Board Alibaba Group Stock Before It Rallies

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Alibaba stock - Board Alibaba Group Stock Before It Rallies

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Volatility has lingered in the equity markets since the beginning of February, as a deluge of negative headlines worry investors. Alibaba Group (NYSE:BABA) corrected almost 20%, but within a month Alibaba stock had recovered most of it.

Somewhere between the recent high and the low lies equilibrium. And therein lies my opportunity.

The elevated level of the CBOE Volatility Index (INDEXCBOE:VIX) bring about opportunities to sell downside risk into fear. But provided I have clear support levels that I can trust.

Baba stock has demonstrated a strong band of support since last August. With my bullish trade setup today, I am betting that support will continue to hold through this period of uncertainty.

Fundamentally, Alibaba stock is not cheap. With a 50 trailing price-earnings ratio, it is much more expensive than Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) or Facebook Inc (NASDAQ:FB). But considering its growth and success so far, BABA isn’t bloated.

There are risks. BABA is near all-time highs, so there could be more downside in the short term. But in the long run, Alibaba stock is a winner. So owning shares at a deep discount from here is not likely to be a financial problem.

Alibaba Stock Technicals

Technically, BABA stock has been setting higher lows, thereby creating a sharp ascending trend line that needs to hold. Otherwise, its breach would invite some technical selling. So I will use the options market to generate income while leaving plenty of room for error.

Alibaba management will report earnings in May, and I believe they will tell a good story. Meanwhile, investors are nervous these days and that is understandable. That is why I’m not risking $195 per share to buy the stock at face value today. Leaving room for error gives me better conviction in my strategy during these difficult periods.

Experts on Wall Street are almost unanimous that Alibaba stock is a buy. The risk is that it is currently trading close to the high end of its price range. So analysts need to raise their estimates. In uncertain times, however, a few might be tempted to downgrade either the stock or their price targets. Nevertheless, I don’t believe it will be a deluge.

The Bet: Sell BABA June $150 naked put for $1.75. This is a bullish trade where I have an 85% theoretical chance for maximum gains. Otherwise, I will own shares and accrue losses below $148.25. Selling naked puts carries big risk especially for a stock as frothy as BABA. For those who want to mitigate it, they can sell a spread instead.

The Alternate Bet: Sell the BABA June $150/$145 credit put spread where my risk is limited. Yet, if the spread wins it would deliver a 12% yield.

Subscribe to my YouTube channel for free newsletter & content here. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on twitter and stocktwits.

Nicolas Chahine is the managing director of SellSpreads.com.


Article printed from InvestorPlace Media, https://investorplace.com/2018/03/board-alibaba-group-stock-before-it-rallies/.

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