Is Alibaba’s (BABA) Post-Earnings Dip a Buying Opportunity?

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 spot outperforming stocks and place spreads that take advantage of the momentum.  By the way, while last week was the worst week for the market in several years, our most popular portfolio managed to gain 55% for the week after its underlying (Facebook) announced earnings.

Terry

Is Alibaba’s (BABA) Post-Earnings Dip a Buying Opportunity?

Several analysts believe there is further upside ahead for Alibaba, here are two of them – Alibaba PT Raised to $218 at Deutsche Bank and Alibaba PT Raised to $250 at Morgan Stanley.

Alibaba stock fell under pressure following last week’s earnings release and is seen trading near the halfway point measured from last month’s low to a high posted at the end of January.  Strong support is seen near the psychological $180 price point as it confluences with the lower line of a rising trend channel as well as the 61.8% Fibonacci retracement of the leg higher from early December.

BABA Chart January 2018

*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 over the next five weeks, or at least not decline very much.

Buy To Open BABA 9Mar18 177.50 Puts (BABA180309P177.5)
Sell To Open BABA 9Mar18 180.00 Puts (BABA180309P180) for a credit of $0.85 (selling a vertical)

This price was $0.02 less than the mid-point of the option spread when BABA was trading near $187.  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 $83 and your broker would charge a $250 maintenance fee, making your investment $167 ($250 – $83).  If BABA closes at any price above $180.00 on March 9, both options would expire worthless, and your return on the spread would be 50% (567% annualized).

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

IBD Underlying Updates February 1, 2018

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