Alibaba Group Holding Limited (NYSE:BABA) reported earnings this morning and Wall Street likes what it sees. The stock spiked up 4% on the headline. But this earnings season has been all about sustaining the rallies. There haven’t been many who accomplished that, as most earnings rallies faded even when good companies reported great earnings. Investors are fickle these days because they are nervous about headlines of rising interest rates, tariff wars and geopolitical unrest.
The company beat on top and bottom lines. They are confident they will have 60% year-over-year revenue increase for 2019. Furthermore and in spite of spending to deliver growth, they are doing it while increasing profitability. They left no arguments for the bears to short. Even Citron Research is positive on the stock.
Fundamentally BABA stock is not overly expensive — it sells at a nearly 50 trailing 12 months price-to-earnings ratio. While this is not cheap in absolute terms, it’s not bloated either considering the growth trajectory of the company. Their user metrics are close to those of Facebook, Inc. (NASDAQ:FB) and Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL).
Last year, investors had an a-ha moment with Alibaba stock. The company promised greater things to come and investors believe them. The results show that management knows what it’s doing, so the stock stepped up in price from $110 a share and now trades closer to $200. And therein lies my opportunity.
This move in price range created a strong consolidation above a neckline against which I can sell risk for income.
I was lucky enough to have had profits in pocket from Alibaba stock coming into the earnings, and today I added to my bullish exposure. But instead of chasing more upside potential I am using options to lower my entry cost. I am very confident of the proven support levels in BABA so I will use that to generate income with no out of pocket expense.
Technically BABA stock defended the $165 per share area vigorously for over 10 months. While this creates a strong base, it also creates a must-hold situation. Losing $165 could bring about a retest of $150 per share. This is not a forecast but it is a possible scenario.
Wall Street experts are unanimous in their “buy” rating on BABA stock and the stock is trading at the low end of the price target range, so they agree that there is upside potential still to come.
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Alibaba Stock Trade Ideas
The Trade: Sell the BABA Oco $140 naked put for $1.60. This is a bullish trade where I have a 85% theoretical chance for maximum gains. Otherwise, I will own shares and accrue losses below $138.40.
Those who want to mitigate the risk that comes with selling naked puts can sell spreads instead.
The Alternate Trade: Sell the BABA Oct $140/$135 credit put spread. The spread has the same odds but would deliver 15% yield on risk. Neither trade requires a rally to profit. In fact, the stock can fall an additional 22% and I could still retain maximum gains.
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.
