Will Alibaba (BABA) Continue The Upward Momentum?

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 portfolios to identify stocks that have displayed strong upward momentum and place spreads that profit it the momentum continues for about six weeks.

Last week, the 10 Terry’s Tips portfolios enjoyed another banner week. While SPY rose 1.1%, all 10 portfolios gained an average of 6.9% and are now up 75% for the year to date.  Isn’t it time you took a look at how we are doing this?  You just might learn something new.

Terry

Will Alibaba (BABA) Continue The Upward Momentum?

Some well-known analysts are quite bullish Alibaba stock and outline why they expect further upside here – Why Druckenmiller Is Optimistic about Chinese Consumer Stocks and Why Goldman Sachs is Optimistic about Alibaba.

BABA has been trending higher since late 2015 with a boost in upside momentum since the start of the year.  The stock gapped higher following the last earnings report and recently broke to record highs without closing the gap.  The 20-day moving average has held the stock higher since the middle of August and offers strong downside support as it resides within proximity of last month’s close of 172.47

BABA Chart September 2017

*source Tradingview.com

If you agree there’s further upside ahead for Alibaba, consider this trade which is a bet that the stock will continue to advance at least a little over the next six weeks.

Buy To Open BABA 27Oct17 175 Puts (BABA171027P175)
Sell To Open BABA 27Oct17 177.5 Puts (BABA171027P177.5) for a credit of $0.75 (selling a vertical)

This price was $0.02 less than the mid-point of the option spread when BABA was trading near $177.  Unless the stock rallies quickly from here, you should be able to get close to this amount.

If you use our favorite broker for this trade, tastyworks, your commission on this trade will only be $1 per opening contract ($2 per spread) (and there is no commission on closing trades, only the $.10 clearing fee).  Each contract would then yield $73 and your broker would charge a $250 maintenance fee, making your investment $177 ($250 – $73).  If BABA closes at any price above $177.50 on October 27, 2017, both options would expire worthless, and your return on the spread would be 41% (357% annualized).

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

IBD Underlying Updates September 15, 2017

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