Has Alibaba (BABA) Reversed Into a Bullish Trend?

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.

With the markets bouncing higher, news outlets have started publishing articles on where big investors are putting their money. Have a look at what these two articles have to say about Alibaba – Bullish investors pour money into Alibaba, Amazon, Intel and Microsoft and 5 Stocks Top Earners Steven Cohen and David Tepper Agree On.

Technicals

BABA has bounced higher from an important technical support confluence that consists of a rising trendline and a horizontal level. The trendline originates from a low posted at the end of 2018 and the while the stock holds above it, the broader bullish looks to still be intact. Since turning from this support confluence, BABA has regained it’s 200-day moving average which is encouraging for bulls. Buyers should defend dips towards the trendline to maintain the upward momentum. A possible near-term target is found at $211 which has previously acted as both support and resistance.

BABA Chart March 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 very much.

Buy To Open BABA 08MAY20 185 Puts (BABA200508P185)
Sell To Open BABA 08MAY20 187.5 Puts (BABA200508P187.5) for a credit of $1.03 (selling a vertical)

This price was $0.02 less than the mid-point of the option spread when BABA was trading near $189.  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 $101.70 and your broker would charge a $250 maintenance fee, making your investment $148.30 ($250 – $101.70).  If BABA closes at any price above $187.5 on May 08, both options would expire worthless, and your return on the spread would be 69% (787% annualized).

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

IBD Underlying Updates March 28, 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