Some on Wall Street are alarmed by the recent headlines concerning China-based tech giant JD.com (NASDAQ:JD). That doesn’t mean you can’t play JD stock without getting burned. Instead of risking it all by shorting JD shares, try this options trading strategy for strong, risk-adjusted returns.
Shares of JD.com took a 10.64% haircut Wednesday for a second straight day, as investors react defensively to sexual misconduct allegations against JD’s CEO, Richard Liu.
Liu was arrested in Minnesota but later released and allowed to go back to China with no charges filed by U.S. authorities, but an investigation into the incident is still ongoing. In a statement to the press, JD.com said there is no impact on business operations and Liu would be working this week.
But the company’s assurances haven’t stopped investment bank Stifel from playing JD stock a bit more cautiously.
Analyst Scott Devitt lowered his price target to an above-the-market $38 on potential “key-person” risk and a likely, continued negative overhang in JD. However, judging by the weekly chart in shares I’d say Mr. Devitt could have safely lowered his behind-the-times revision to $34 in JD stock.
JD Stock Weekly Chart
The potential scandal in JD stock has continued to strip shares of any resemblance to U.S. e-commerce tech giant Amazon.com (NASDAQ:AMZN) or Chinese peer Alibaba (NYSE:BABA). JD is now off nearly 37% year-to-date compared to AMZN stock’s dearly held gain of 70% and BABA’s modest dip of 4.65%.
But the real story told on JD’s price chart remains a risky head and shoulder pattern’s neckline. The key price support near $34 a share was broken last month on Chinese retail sector worries and reinforced following the company’s disappointing earnings announcement.
A measured move from the breakdown of the neckline suggests JD stock has downside risk to around $20. Coupled with an existing double-bottom low of $19.51 and a likely revisiting of support, the bear case and opportunity for traders willing to position short only grows more authoritative.
JD Stock Options Trade
Back in July, and as part of a pairs trade, an anticipated breakdown of JD’s neckline had us offering a September bear put spread, which has enjoyed an almost certain and terrific payoff of $2.92 in profit for a return of 270%.
Reviewing the options market for fresh bearish positioning, the Dec $25/$23 put spread is currently favored. With shares of JD at $26.30 the vertical is priced for 65 cents. The purchase limits exposure to an adverse price move to roughly 2.5% and in an uncertain world is staunch protection for this bearish trader versus a much riskier short stock position.
Regarding profits, this vertical allows traders to position for more than three months and capture up to $1.35 if JD stock sinks below $23. That’s a return in excess of 200%. With the discussed technical price objective near $20, the spread could be considered conservative in its design while having a potential bearish earnings catalyst in the fold, maybe more of Mr. Devitt’s proffered overhang in shares — and certainly solid technical support from JD stock’s price chart.
Investment accounts under Christopher Tyler’s management do not currently own positions in any securities mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.
