This year the U.S. stock market started a correction in early February from headline fears of rising rates. But since then, we have recovered nicely despite a slew of headline worries over global tariff wars. However the Chinese stock market continued this slide into a bear market territory. Stocks like JD.com (NASDAQ:JD) are still hideously caught up in the slide.
Yesterday was an ugly day for JD stock and others, spurred by a bad earnings report from Tencent (OTCMKTS:TCEHY), which rekindled fears that the tariff wars are slowing the Chinese economy. But therein lies the opportunity.
Often enough, Wall Street prices in too much fear on headlines. And in the process, quality stocks suffer too harshly.
This morning JD management made matters worse for their stock. They reported earnings and investors did not like the report. In spite of a 31% increase in revenues, they missed on the P&L metrics, which is rare these days. So traders were right to sell JD stock down 2% on the headline.
But despite the lackluster earnings report, there is an opportunity to create income from what others fear. I can do this without even needing a a rally from here.
There is a good chance that JD stock has already shed enough froth and that long-term proven supports below will hold through 2018.
How to Trade JD Stock Today
My approach to JD is a “rinse-and-repeat” trade, since I was lucky enough to share a similar bet that paid in May.
JD is a momentum stock, so it runs fast in either direction, which makes this a medium-conviction trade with tight stops. If the worst case scenario unfolds, I own JD stock at a 15% discount from its current price. In that case, I am comfortable that I could manage out of them for minimal or no damage.
We are still in headline trading mode, so we are vulnerable to surprise headlines, which adds unusual risk to this trade. I am not required to hold it open through respiration. I can close it at any time for partial gains or losses.
The Bet: Sell the JD Jan 2019 $28 naked put for $1. This is a bullish trade, where I have an 85% theoretical chance for maximum gains. Otherwise, I will own shares and accrue losses below $27.
Selling naked puts carries big risk, especially for something as frothy as JD stock. For those who want to mitigate the risk, they can sell a spread instead.
The Alternate Bet: Sell the JD Jan 2019 $27/$25 credit put spread. The spread has the same odds, but would deliver 20% yield on risk. Neither trade will require a rally to profit.
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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.
