This week we are featuring an option trading idea based on a stock on the IBD Top 50 List that just delivered robust earnings guidance. We have added this spread to the Terry’s Tips portfolio which trades vertical credit put spreads on selected IBD Top 50 companies (this portfolio has gained 77% so far in 2017).
Is Alibaba (BABA) Ready to Accelerate Higher?
Alibaba, broke out to fresh all-time highs last week following better than expected financial results both on the top and bottom line. Prices have been forming a bull flag pattern which is a pause that refreshes higher.
If you concur with the views expressed by these analysts, consider making this trade which is a bet that BABA will continue to advance (or at least not decline very much) over the next five weeks:
What impressed investors even more than the company’s financial result, was the company’s forward guidance. The Chinese e-commerce giant estimates that revenue will increase almost 50% in the 2018 fiscal year. Analysts had previously estimated a revenue increase of about 35%. In the wake of this news, the average price target was raised to $160 with the highest at $190.
After a round of profit taking the stock should resume its climb. The stock price has not closed below its 10-day moving average since February. One way to bet on a further climb would be to put on a bull put credit spread where the short strike was below the 20-day moving average. Support is seen near the 10-day moving average at $136.92.
Buy To Open BABA 21Jul17 133 puts (BABA170728P133)
Sell To Open BABA 21Jul17 136 puts (BABA170728P136) for a credit of $1.12 (selling a vertical)
This price was $0.03 less than the mid-point of the option spread when BABA was trading slightly above $139. 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 $2 per contract (and there is no commission on closing trades, only the $.10 clearing fee). Each contract would then yield $110 and your broker would charge a $300 maintenance fee, making your investment $190 ($300 – $110). If BABA closes at any price above $136 on July 28, 2017, both options would expire worthless, and your return on the spread would be 58% (603% annualized).
As with all investments, you should only make option trades with money that you can truly afford to lose.