This morning, I’m recommending a bullish trade on Alibaba Group Holding Limited (NYSE:BABA), the online and mobile commerce company.
China has been in the news all week. The U.S. is preparing for another round of trade talks, and Bloomberg recently reported that White House officials were considering different ways to place limits on U.S. investors’ portfolio flows into China. One method they allegedly considered was delisting Chinese companies from U.S. stock exchanges.
Treasury spokeswoman Monica Crowley said the administration wasn’t considering that course of action, but the fact that it was reported created some doubt around Chinese stocks like BABA.
The fear around Chinese stocks boosted the premium in put options on stocks like BABA, making it an excellent time to take on a bullish naked put write.
BABA is China’s Amazon (NASDAQ:AMZN), and the giant tech company is always expanding the products and services it offers.
Still, the stock was hit hard last week and again earlier this week because of the aforementioned rumors.
It’s also possible that the escalation of violence in the Hong Kong protests has hurt optimism around a U.S.-China trade deal. President Trump has previously said that violence similar to that of the Tienanmen Square massacre would make a trade deal more difficult. Though the violence hasn’t reached that level, we aren’t seeing any signs China will take steps to ease tensions.
But amidst all these volatility-inducing stories, BABA’s technical performance gives me confidence the stock won’t drop too dramatically.
Picking a low Strike Price
As mentioned above, the increased fear around Chinese stocks has increased the premium available on BABA puts. As a result, we can still collect a decent premium on put options with a lower strike price than I would normally recommend. In this case, I am recommending the $135 strike price, which is more than 20% below BABA’s current price.
Daily Chart of Alibaba Group Holding Limited (BABA) — Chart Source: TradingView
In the chart above, you can see that BABA has been making higher lows for the past few months. In a pullback, it could develop support at $148 or $152, both of which are well above the strike price I am recommending.
Sell to open the BABA Nov. 1st $135 put at about $0.35.
Note: Be sure you are opening the weekly BABA options that expire on Friday, Nov. 1, 2019.
About Naked Put Writes
A naked put write is a bullish position in which you expect the price of the underlying stock to increase.
If you are holding the option at expiration and the stock is trading below the $135 strike price, you will be put 100 shares of BABA at $135 per share.
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