Trading Exposure to Alibaba Stock is Worth the Risk Ahead of Earnings

BABA stock is leading the markets higher as investors eye Friday’s quarterly results

Following Monday’s explosive gains in Alibaba Group (NYSE:BABA), you may think you’ve missed the move. But with earnings on tap and other powerful catalysts both off and on the Alibaba stock chart, the potential for continued upside looks increasingly favorable for today’s investors. Let me explain.

Trading Exposure to Alibaba Stock is Worth the Risk Ahead of Earnings
Source: testing /

It was quite the bullish start to the trading week for China’s e-commerce juggernaut. Promising macro reports from biotech Moderna (NASDAQ:MRNA) and a very bullish-leaning interview from Fed chief Jerome Powell on CBS’ 60 Minutes sent stocks across international markets rallying. Nevertheless, the bid in the diversified tech giant did stand out.

U.S.-based equivalent and competitor Amazon (NASDAQ:AMZN) finished up just 0.68%. Of course, Amazon shares have been a market standout in their own right. Moreover, the tech giant showed determined relative strength compared to major benchmarks which racked up gains of around 2% to 4% on the session.

Betting on Results

So, what gives? Aside from an increasingly supportive market environment for risk assets, Alibaba’s out-performance appears tied to some investors betting on favorable first quarter results when the company reports on Friday morning.

In front of the release, consensus views are for a profit of 59 cents per share. The forecast reflects a 33% dip from the year-ago period and larger swing away from last year’s 41% same-quarter profit jump. Still, sales are expected to grow 9% despite a Washington-Beijing trade war and a quarter turned upside down by the novel coronavirus pandemic. As well, there are other good reasons to believe a return to stronger growth is in store for Alibaba.

On top of its e-commerce business, InvestorPlace contributor Louis Navellier sees the upside potential for Alibaba based on the company’s ballooning cloud growth and strong positioning within the field of artificial intelligence. The message is investors shouldn’t get weighed down by the rearview mirror if the company reports an earnings miss. Bottom line, it’s all about the second half of 2020 and beyond for Alibaba.

Alibaba Stock Monthly Chart

Source: Charts by TradingView

Other investors assisting in Alibaba’s outsized gains may simply be betting on a favorable forward-looking price chart that’s well-positioned for buying today. Technically, the extended monthly view reveals that shares have just re-crossed a former all-time-high from 2018. The price action sets up a second-attempt breakout entry and looks bullish.

Monday’s move out of the original basing pattern also has the benefit of Alibaba shares signaling through the high of a trend-defining hammer candlestick formed in March. I’ve captured that in yellow highlight on the above chart. Coupled with stochastics crossing bullishly just inside neutral territory, potential price momentum furthered along by a favorable earnings reaction looks compelling.

For shorter-term investors wanting exposure through the earnings event and its “all or none” potential implications, I’d recommend Alibaba’s options market for positioning. Specifically — and given a history of fairly split, but bullishly-biased earnings moves over the last six quarters — one limited and reduced risk spread that looks appropriate is the ’05 June $225 / $235 bull call spread.

Minimal Risk

With shares of Alibaba changing hands for $219.75, this vertical is priced for $3.00. The purchase price works out to less than 1.50% of the risk associated with owning BABA stock. In the event shares fall in the report’s aftermath, the worst case scenario for this strategy is the initial debit. That could always come in handy.

Opportunistically, this Alibaba strategy allows for a couple weeks of bullish participation and begins to accrue intrinsic value above $225. That’s only a couple percent away. And given Alibaba’s split, but bullish-leaning history of 5.65%, 8.13% and 9.53% over the past 18 months, the chance for marginally new all-time highs and a fully valued spread of $10.00 yielding profits of $7.00 or return of 250% looks interesting to say the least.

Disclosure: Investment accounts under Christopher Tyler’s management do not currently own positions in 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.

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