JD.Com Inc(ADR) (NASDAQ:JD) reported earnings this morning and Wall Street did not like what they saw. The stock fell 4% on the headline as management delivered results that missed on the bottom line with a beat on the top line.
Results like this are usually okay for a growth tickers like JD. Young companies must sacrifice profits to deliver growth. So investors who buy into the idea of JD should insist on top line improvements even at the expense of bottom-line numbers. Afterall, it’s in a heated battle with a worthy adversary that is Alibaba Group Holding Ltd (NYSE:BABA), There are critics who believe that there is financial engineering more so than actual improvements, but only time will tell him that.
To make matters worse, JD stock came into the earnings down 11% year-to-date. So bulls have dug themselves a deeper hole with this earnings report. Today I want to capitalize on the fear in order to generate profits without any out-of-pocket expenses.
Usually, I like to sell downside risk into value. But JD stock is definitely not cheap from the traditional sense. So I consider this a speculative trade to a degree and I don’t intend to make it an investment. Meaning I will set tight stops to exit the trade if it goes against me too far.
Technically JD stock is nearing important pivots. It has recently defended the $36 per share area several times. This has been a pivot point since June of 2015. JD bulls and bears have been battling it out. Most recently in May of 2017 the bulls prevailed to reach new highs. But not without several retests of the neckline from which they broke out. This morning’s drop, brings the price back closer to it and therein lies the opportunity.
Long term battle zones like this one tend to be supportive on the way down. Neither side wants to lose so they battle hard.
Nevertheless, there is technical risk. JD stock if it loses this neckline would be at risk of retesting $32 per share which is a similar push-pull zone but lower. This is not a forecast but rather a scenario that I have to consider when placing my risk.
I use JD options instead of risking $37 per share with no room for error. With options, I can build a buffer from current prices just in case. This week, we have several geopolitical and macroeconomic headlines coming from the White House so hopefully, they come out supportive of higher stock prices thereby helping the trade as well.
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The Trade: Sell JD Dec $31 put for $1. This is a bullish trade which does not require a rally to profit. Here I have an 80% theoretical chance of success. But I would accrue losses below $30.
Selling naked puts is daunting. Those who want to mitigate that risk can sell spreads instead.
The Alternate Trade: Sell the JD Dec $30/$28 credit put spread which would deliver over 20% in yield but with much smaller risk. Both set ups have about the same odds of success and neither require a rally to win.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on twitter and stocktwits.
