By: Steve Smith
Alibaba (BABA) is known as the Chinese Amazon, and it’s set to report earnings prior to the open tomorrow. This is a great – and time-sensitive – options trading opportunity.
The great thing about earnings reports is you can get quick swift move and when coupled with options can deliver large, sometimes in excess of 100% gains in a single day.
I have such a play in Alibaba; here are the basic stats of the set up:
Current Price: 176.40
Reports: 8/23 Before Open
Implied Volatility: 81%
Expected Move: 6.2% or $10.70
Strategy: Bullish Vertical Call Spread
Entry Net Debit $3.35 (Do not pay more than $3.50)
Exit Target: Credit $6.85 with maximum of $7.50
Basically, if the shares move above $182.50, or just a 3.3% or $6, can realize a 115% return.
Alibaba shares have recently com under pressure, along with many Chinese stocks, for two main reasons. Tencent (TCEHY), it’s main rival, reported disappointing earnings last week casting a pall over the group. But much of TCHY’s problems were isolated to the company’s video game sector which saw the government ban/censor some of the most popular games.
As a related side note, while the BABA and TCHEY are fierce rivals, BABA has a distinct competitive advantage that its founder and CEO, Jack Ma, is the governments favorite son and held forth as the ambassador for Chinese style capitalism. TCHEY CEO Tony Pa has a more antagonistic relationship with the powers that be. But that’s just background.
- There is general concern about the health of the Chinsese economy related debt, tariifs and the weakening yuan.
- For the above reasons estimates have been cut from $1.37 to $1.21 per share over the past 30 days making for low expectations.
- This would still be a 10% YoY growth.
- Revenue is expected to grow over 60% YOY.
- I think the company delivers and investors are reminded there are very few companies of this size and market dominance –and great margins—able to grow at such a rate at a reasonable p/e of 22 forward earnings.
- And institutions will pile back into the shares.
Lastly, the $175 level is key support on the chart.
I suspect that if I’m wrong, it’s going to be very wrong, so I don’t need to have too much intrinsic value.
Let’s use a vertical spread that tries to capture a decent move, and has the potential for over 100% gain.
-Buy to open 1 contract August (8/24) 175 Call
-Sell to open 1 contract August (8/24) 182.5 Call
For a Net Debit $3.35 (+/-$0.10)
Steve Smith have been involved in all facets of the investment industry in a variety of roles ranging from speculator, educator, manager and advisor. This has taken him from the trading floors of Chicago to hedge funds on Wall Street to the world online. From 1987 to 1996, he served as a market maker at the Chicago Board of Options Exchange (CBOE) and Chicago Board of Trade (CBOT). From 1997 to 2007, he was a Senior Columnist and Managing Editor for TheStreet.com, handling their Option Alert and Short Report newsletters. The Option Alert was awarded the MIN “best business newsletter” in 2006. From 2009 to 2013, Smith was a Senior Columnist and Managing Editor for Minyanville’s OptionSmith newsletter, as well as a Risk Manager Consultant for New Vernon Capital LLC. Smith acted as an advisor to build models and option strategies to reduce portfolio exposure and enhance returns for the four main funds. Since 2015, he has worked for Adam Mesh Trading Group. There, he has managed Options360 and Earning 360, been co-leader of Option Academy, and contributed to The Option Specialist website.
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