Shares of Alibaba Group Holding Ltd (NYSE:BABA) are certainly flying high lately, following an earnings report that beat big time on both the top and bottom line. BABA stock has now risen for eight straight days and is up 10% post earnings and nearly 100% year to date. I am not disputing the dominance of Alibaba, but I do think BABA stock has come too far, too fast and is due for a pause over the coming weeks.
![The Rally In Alibaba Group Holding Ltd (BABA) Stock Is Getting Too Hot to Handle](https://investorplace.com/wp-content/plugins/lazy-load/images/1x1.trans.gif)
InvestorPlace contributor Larry Ramer does a superb job drilling down into the Alibaba earnings report, highlighting the aforementioned explosive earnings and revenue growth.
Of the 49 analysts covering BABA, 41 give Alibaba strong buy rating with a consensus price target of $192.54. MKM partners just upped their price target to $220 from a previous $177. Everyone, it seems, is in love with Alibaba, which gives me pause from a contrarian standpoint.
Alibaba now sports a market cap of $450 billion, making it the sixth-largest stock in the S&P 500 and just $10 billion shy of e-commerce competitor Amazon.com, Inc. (NASDAQ:AMZN) for the number five spot. As history has proven time and time again, growth rates necessarily slow as companies reach mega-cap status simply due to the law of large numbers. A quick look at the recent chart of Facebook Inc (NASDAQ:FB) reinforces this notion.
Speaking of charts, the BABA chart below shows just how overextended Alibaba stock has become. The 9-day RSI is now perched at an extremely overbought reading of 84. Previous instances over the past year when Alibaba stock reached these levels proved to be significant short-term tops in the stock.
Factor in that shares have closed higher for eight days in a row and it isn’t hard to fathom that BABA stock may be due for a breather.
Alibaba is also trading at the highest price-to-earnings multiple over the past five years, eclipsing 60 on a trailing-12-months basis. Forward P/E ratios of 43.4 for 2018 and 31.95 for 2019 are certainly no bargain either. After such a massive rally, BABA stock is certainly priced for perfection.
So to position for a period of consolidation in Alibaba, a bear call spread trade makes sense. Implied volatility (IV) is at 49%, meaning option prices are still rich enough to employ selling strategies.
Alibaba Stock Trade Idea
Buy BABA Sep $187.50 calls and sell BABA Sep $185 calls for a 40 cents net credit.
Maximum gain on the trade is $40 per spread with maximum loss of $210 per spread. Return on risk is 19%. The short $185.50 strike price provides a 5.23% upside cushion to the $175.80 closing price of Alibaba.
As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the Delta Desk Research Report can email Tim at timbiggam@gmail.com.