Trade view /
10 January 2017 at 10:46 GMT
Singapore-based Saxo Bank sales trader Shiyun Su provided the following input
on Chinese online retailer Alibaba. We found the information compelling from a risk/reward perspective and so stitched it together as an options strategy.
Alibaba Group (BABA:xnys) has been in the headlines since the start of 2017 and is up about 7.8% year-to-date on positive news. Since Q4'16, Alibaba has been under pressure due to its accounting practices, concerns over Chinese economic problems, and US president-elect Donald Trump’s anti-China view, dragging prices down more than 20% from their October 2016 peak of $110 to reach a bottom of $86 in December.
Our view: Alibaba's long-term growth story remains intact with support from a strong balance sheet; in the short-term the share price is likely to retreat after its bid for Intime Deal, which may offer a good buying opportunity (note: the Hong Kong-listed Intime Retail Group surged 35.7% today)
From the headlines:
- Alibaba Takes Big Step Offline With $2.6 Billion Intime Deal
- Alibaba founder Jack Ma meets with Trump, pledges to create 1 million US jobs
- Alibaba claims legal first in China piracy war by suing online fake watch
- Analysts remain bullish on the prospect of Alibaba
- 41 Buys, 5 Holds and 0 Sells
- 12M TP at 120.88 (27.6% upside)
- PE = 57.84 (Relatively cheaper than Amazon PE = 182.14)
- Next earnings to watch: February 2, 2016
- Price has corrected 21% from peak and found support around the 200-day moving average
- Any short-term retracement may offer an entry opportunity
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Source: Saxo Bank
Management and risk description
The trade could be approached with a buy/write, or buying the shares at market and selling 17 FEB 17 100 calls for a credit of almost $2.
However, due to our smaller account size ($25,000) we are going to use a short put vertical spread and limit the risk to just $1.60 per contract. Here's how the trade looks:
Source: Dynamic Trend
Caution: the company is due to report earnings February 2.
Underlying price: $94.70
Sell -1 17 February 17 92.50 put at $2.88
Buy +1 17 February 17 90 put at $2.00
Net Credit $0.88
Maximum gain at expiraiton ($0.88)
Maximum loss at expiration ($1.62)
Breakeven at expiration: $91.62
Probability of option expiring OTM: 60%
Entry: today for a credit of $0.88 or better.
Stop: no stop.
Target: underlying to trade above $92.50.
Time horizon: two to three weeks.
— Edited by Michael McKenna
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Non-independent investment research disclaimer applies. Read more