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.
ACTION:
-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)
