Alibaba Group Holding Ltd (NYSE:BABA) has been holding well in a struggling equity tape. Just under a month ago, I shared a trade to go long BABA stock for free, and it’s been profitable. Today, I look to repeat that performance with a similar setup, though over a longer time frame.
The trade from March was in itself a repeat performance of one I shared in 2016. I don’t like to change winning strategies so I stick with what’s working.
For the past year, there were no major adverse fundamental changes in Alibaba’s operation. While a trailing price-to-earnings ratio of 50 isn’t cheap, it’s not outrageously expensive either — as long as the company continues to deliver on growth.
I do have to recognize that almost all the analysts who cover BABA stock have it as a buy or outperform. This leaves it vulnerable to the potential that some would demote the rating.
Click to Enlarge Technically, Alibaba stock has been in breakout mode since February. It reached its first measured target, and now it’s in the process of pricing in a second target. I think $115 per share (or more) is within reach … provided that the stock market in general doesn’t correct.
How to Trade BABA Stock
The long side: Sell the Jan 2018 $85/$80 credit put spread for 70 cents per contract. This is a bullish trade that has an 85% theoretical chance to yield 14% on money risked.
Usually, I like to balance my trades. In this case, I want to sell opposing upside risk against Alibaba stock as a hedge.
The hedge: Sell the Jan 2018 $140/$145 credit call spread for an additional 65 cents per contract. This bearish trade has an 80% theoretical chance of success.
By taking both trades, I would have sold an iron condor with a +/- 25% buffer from current prices. Since I can only lose on one side or the other, if successful, my reward on BABA stock would be more than 30%.
Learn options as easy as 1-2-3 here. 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 on Twitter at @racernic and stocktwits at @racernic.
