Look for a Bounce In Alibaba as Trump Tariff Turmoil Eases

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BABA stock - Look for a Bounce In Alibaba as Trump Tariff Turmoil Eases

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Shares of Alibaba (NYSE:BABA) have certainly felt the effect of the recent Chinese tariff and trade war turmoil. BABA stock was trading at all-time highs just a few weeks ago, which seems like a distant memory now that Alibaba has been fallen 9%. While assuredly some of the pullback was warranted, the selling in Alibaba is beginning to get overdone. I expect Alibaba to find some footing near current levels over the coming weeks.

BABA stock is getting decidedly oversold. The 9-day RSI is below 30 and nearing the lowest readings of the past year. The previous two times Alibaba breached the 30 level proved to be significant lows in the stock.

There is major support at $191 and further downside support looms at the 200-day moving average near $185. Given the dramatic drop in BABA stock, a rally from these levels would not be unexpected. Any counter trend rally could be fast and furious.


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In my previous analysis of Alibaba from June 15, I had a definite bearish tone as BABA stock approached all-time highs above $210. Now that Alibaba has subsequently dropped 9% in just seven trading days, my negative viewpoint has tempered — because price ultimately does matter.

Amazing how quickly things can change in this market environment. As traders, we need to have the ability to change along with it.

Implied volatility (IV) in BABA options has certainly changed quickly as well. On June 15, IV was at the lowest levels of the year. The recent carnage in BABA stock has now driven IV to the highest levels since the last earnings report. This means that option prices have become comparatively expensive. This favors option selling strategies when constructing trades. So to position for the selling to abate in BABA stock, a bullish put credit spread makes probabilistic sense.

BABA Stock Trade Idea

Buy BABA July $170 puts and sell BABA July $175 puts for a 60-cent net credit.

Maximum gain on the trade is $60 per spread with maximum risk of $440 per spread. Return on risk is 13.6%. The short $175 strike price is well below both the $191 support level and the 200-day moving average at $185.09 and provides a 8.5% downside cushion to the $191.25 closing price of BABA.

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/


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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/2018/06/look-for-a-bounce-in-alibaba-as-trump-tariff-turmoil-eases/.

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