After months of teasing shareholders with choppy, rope-a-dope action, Alibaba Group Holding Ltd (NYSE:BABA) has finally decided to pick a direction.
And it’s HIGHER.
Spurred by U.S. equities notching new all-time highs, Alibaba is staging a breakout attempt of its own today. While the Chinese e-commerce giant remains well below its ultimate peak, today’s pop was sufficient to carry BABA to a new high for 2016.
The multimonth range in the stock leaves little need for trend analysis. Moving averages are mired in the mud, slithering sideways in noncommittal fashion. Any attempts to breach the lower end of the range were a ruse designed to reel in unsuspecting bears.
And while today’s break could be a similar feint to sucker in bulls, the high volume accompanying yesterday’s surge has shareholders hoping this is the breach that sticks.
In light of how far stocks have traveled in the past two weeks, BABA included, it is worth allowing a few days to see if a pause materializes to digest recent gains.
To be clear, if today’s breakout sticks and BABA pauses for a few days to work off its short-term overbought conditions, a bullish trade may be worth a shot.
It’s Time for BABA Calendars
In case BABA dithers in this area before taking flight, let’s structure a trade that profits from bullish and neutral action. With Alibaba stock options relatively cheap here, I like buying a calendar spread.
As the name suggests, calendars are time spreads structured by purchasing one month and selling another simultaneously. We’re going to buy a longer-term call option while selling a shorter-term one. That way, the trade profits from time decay. The premium received from the short call helps offset the cost, and therefore risk of the entire position.
Buy the Oct $80 call while selling the Aug $85 call. Currently the spread can be purchased around $3.95. The max loss would be limited to the $3.95 and lost if BABA stages a massive drop.
A realistic target to shoot for is a $1 to $1.50 gain and should be realized if BABA stock can rise towards the $85 level in the month ahead.
At the time of this writing Tyler Craig had no positions on any of the aforementioned securities.
