Alibaba (BABA) Looks Appealing After Strong First Quarter Results

This week we are looking at another of the Investor’s Business Daily (IBD) Top 50 List companies.  We use this list in one of our options portfolios to spot outperforming stocks and place option spreads that take advantage of the momentum.

Several analysts expect more upside for BABA’s stock price. Check out what the following two reports had to say about it – Post-Earnings Alibaba (BABA) Opportunity and Will Alibaba Be the Next Trillion-Dollar Giant?

Technicals

From a technical perspective, BABA has been consolidating within a triangle for the better part of two months. More specifically, the stock is holding in an ascending triangle, a pattern that is bullish. The stock has not yet broken higher from it, but the recent upward momentum hints that it is only a matter of time. Typically, when a consolidation pattern like this is broken, the stock sees a renewal of upward momentum.

BABA Chart August 2020

If you agree there’s further upside ahead for BABA, consider this trade, which is a bet that the stock will continue to advance over the next five weeks, or at least not decline by much.

Buy To Open BABA 25SEP20 262.5 Puts (BABA200925P262.5)
Sell To Open BABA 25SEP20 265 Puts (BABA200925P265) for a credit of $1.23 (selling a vertical)

This price was $0.02 less than the mid-point of the option spread when BABA was trading near $266.  Unless the stock rallies quickly from here, you should be able to get close to this amount.

Your commission on this trade will be only $1.30 per spread.  Each spread would then yield $121.70 while your buying power would be reduced by $250, making your net  investment $128.30 ($250 – $121.70).  If BABA closes at any price above $265 on September 25, both options would expire worthless, and your return on the spread would be 95% (121.70/128.30), or 1,084% annualized.

Changes to Investor’s Business Daily (IBD) Top 50 This Week:

IBD Underlying Updates August 22, 2020

We have found that the Investor’s Business Daily Top 50 List has been a reliable source of stocks that are likely to move higher in the short run.  Recent additions to the list might be particularly good choices for this strategy, and deletions might be good indicators for exiting a position that you might already have on that stock.

As with all investments, you should only make option trades with money that you can truly afford to lose.

Happy trading,

Terry