Bears are likely sharpening their teeth as they target a weak-looking Alibaba Group (NYSE:BABA) stock on and off the price chart. But all may not be what it seems. For Alibaba stock bulls willing to see better days ahead in 2019, a well-positioned modified butterfly spread is merchandise worth shopping for today. With a gain of 97%, BABA stock is one of the market’s stronger, more tenacious mega-cap performers in 2017. Alibaba stock has taken trend traders for a ride this year. It’s also been an unprofitable period with BABA dipping by roughly 6% in 2018. So, what gives?
Blame BABA’s share decline on what you will. Maybe it’s counterfeit merchandise problems that have plagued the company in the past? Or maybe the drag on Alibaba stock has to do with China-based tech companies fingered for stealing American intellectual property? Those problems could certainly play a part in the weakness.
But for most investors the cloud and e-commerce giant and a company routinely likened to China’s Amazon.com (NASDAQ:AMZN), pressure on Alibaba stock has been largely about (and unsurprisingly) a costly trade war between the U.S. and China and some unease regarding co-founder and chairman Jack Ma’s announced retirement next year.
Still, amid the ongoing and growing worries, Goldman Sachs reiterated the firm’s Buy rating on Alibaba stock and $247 price target which implies upside of nearly 55%.
Goldman’s Piyush Mubayi continues to stand behind the “Conviction Buy” recommendation citing multiple bullish drivers for Alibaba stock. Supports range from the company’s ballooning cloud business dominance, food-delivery platform, the digitalization of Alibaba’s retail experience — and Ant Financial, the company’s financial tech asset and the largest of its kind in the world.
So, who are investors to believe? There’s obviously evidence off the price chart backing both bears and bulls in Alibaba stock. And despite what the former camp might be quick to point out, the same holds true in BABA shares as well.
Alibaba Stock Weekly Chart
Looking at the Alibaba stock price chart and it’s easy enough to see and appreciate a consolidation the past couple weeks that could be labeled a bear flag. Additionally, with the price contraction centered at prior base support, I personally wouldn’t turn a blind eye to the possibility of BABA turning aggressively lower and the 50% retracement level near $135 as the first area of technical support.
Alternatively, the other takeaway in viewing Alibaba is that stocks do correct. And 2018 has already been a victim of this type of technical price action for BABA. The fact is Alibaba stock has been in a volatile, but mostly lateral congestion pattern, throughout 2018. Now and following one last failed breakout attempt, shares have also set investors back a healthy 25% from its high this past summer and possibly worth buying into.
Alibaba Stock Modified Bullish Butterfly
One spread combination favored for this type situation where I’d like to see BABA’s “bear flag” put to rest, but also willing to concede markets in motion can get ugly in a jiffy — is an out-of-the-money modified bullish butterfly spread.
A modified or asymmetrical butterfly combination vastly reduces and keeps downside exposure to a minimum. At the same time, this spread allows for solid profitability and risk-adjusted returns if Alibaba stock can turn the corner higher. Furthermore, unlike a regular butterfly, there’s no risk of a profit turning into a loss if tomorrow’s investor sentiment and price action top our optimism.
With BABA shares under a bit more duress in Thursday’s session near $157, buying the Feb $180/$200/$210 call combination for up to $2.60 is favored. The cost of this spread ensures risk is limited to 1.65% of owning Alibaba stock. In the event we’re wrong the small exposure is obviously an excellent insurance policy, but it also smartly keeps a bullish investor’s powder dry if BABA sinks aggressively lower.
If we’re right, the placement of this spread demands Alibaba stock will need to rally in order to gain in value at expiration as it’s stationed out-of-the-money. Still, with the lower $180 call wing near the midpoint of BABA’s sloppy base, a few months of life in this spread plus two embedded earnings catalysts in the mix — the rally needed to turn a profit is certainly approachable.
As well, with a worst case scenario of $7.40 in profit, and if Wall Street has a change of heart and sets its sights on fresh highs in 2019, this is a combination worth bullish BABA investors’ consideration.
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.
