from the desk of Dr. Terry F Allen

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Consider Alibaba (BABA) Following the Technical Break

Consider Alibaba (BABA) Following the Technical Break

With the stock markets gaining upward momentum Alibaba is gaining attention. The following two analysts have included the stock in their top picks of stocks to own – These 3 ‘Strong Buy’ Giants Still Have Room for Growth, Say Analysts and 5 Mega Cap Stocks Hedge Funds Are Crazy About.

From a technical standpoint, BABA has scaled above a fairly important resistance level at $181. This is a level that held the stock lower since July and the upward break suggests the stock has resumed within its uptrend. Further, the stock has also regained its 20-day moving average and has been trading in a bullish trendline channel which originates from a low printed in early October. There has been a strong show of buying on a retest of the horizontal level in the past week which is also a bullish sign.

BABA Chart November 2019 vertical options spread

BABA Chart November 2019

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 very much.

Buy To Open BABA 20DEC19 180 Puts (BABA191220P180)
Sell To Open BABA 20DEC19 185 Puts (BABA191220P185) for a credit of $2 (selling a vertical)

This price was $0.02 less than the mid-point of the option spread when BABA was trading near $185.  Unless the stock rallies quickly from here, you should be able to get close to this amount.

Your commission on this trade will only be $1.30 per spread.  Each contract would then yield $198.70 and your broker would charge a $500 maintenance fee, making your investment $301.30 ($500 – $198.70).  If BABA closes at any price above $185 on December 20, both options would expire worthless, and your return on the spread would be 66% (753% annualized).

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

IBD Underlying Updates November 16, 2019 via Terry's Tips

IBD Underlying Updates November 16, 2019

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

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I have been trading the equity markets with many different strategies for over 40 years. Terry Allen's strategies have been the most consistent money makers for me. I used them during the 2008 melt-down, to earn over 50% annualized return, while all my neighbors were crying about their losses.

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