Short term
/
Buy
Trade view / 10 January 2017 at 10:46 GMT

Income strategy with BABA — #SaxoStrats

Product Manager, Options Trader, Educator
Denmark
Instrument: BABA:xnys
Price target: 92.50
Market price: 94.72
Background

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
Fundamentals :

  • 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

Technical:

  • Price has corrected 21% from peak and found support around the 200-day moving average
  • Any short-term retracement may offer an entry opportunity

BABA



Create your own charts with SaxoTraderGO click here to learn more

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:

BABA
















Source: Dynamic Trend

Caution: the company is due to report earnings February 2.

Parameters

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

ROR: 54%

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

For more on contract options click here.

Non-independent investment research disclaimer applies. Read more
3y
Mekong Mekong
Hi, Adrian here. I tried to be ambitious by attempting to sell the 105 calls for 1.17, but was unsuccessful.
3y
Georgio Stoev Georgio Stoev
perhaps you should hold onto the shares and leg in later....
3y
Mekong Mekong
I cancelled the order after the shares faded.
3y
Georgio Stoev Georgio Stoev
pre-market BABA is trading up $0.50, it may be ready to resume the positive momentum in today's session.
3y
Feders Feders
Hi Georgio. How do you calculated Probability of option expiring OTM?. Sorry if it is explained in some of your webinar but I don't have time to follow them at the moment.
3y
Georgio Stoev Georgio Stoev
I have my tools :) most tools use Black-Scholes pricing model. A close approximation would be to look at the Delta for the contract, i.e. deep in the money option may have a delta of .90 or a 90% chance of expiring ITM, option with delta of 50 would have about 50% chance of expiring ITM
3y
Kurdeul Kurdeul
Hi Georgio, would it be possible to update Combo orders with GTC?
3y
Feders Feders
Thanks Georgio!, good point that one.
3y
AlexF AlexF
BABA is up pre market, I have a covered call on it at 95 (took it in december), but looks like I may have to buy it back
3y
Georgio Stoev Georgio Stoev
@Kurdeul, we are working on bringing the duration (GTC) back.
3y
Georgio Stoev Georgio Stoev
at AlexF, why would you buy it back? stay the course, you get paid for the time value of the option and your stock is moving up. wait closer to expiration to make a decision.
3y
Georgio Stoev Georgio Stoev
at the open the spread is offered at 0.75.
3y
ChristianK ChristianK
do you recommend moving up the strikes to 95 / 92.2 to increase the net credit and ROR?
3y
Georgio Stoev Georgio Stoev
We are abandoning the trade view for the original strategy, at the moment at least. Need to re-assess
3y
ChristianK ChristianK
got it - thx
3y
Kurdeul Kurdeul
Many thanks Georgio!

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Tradingfloor.com permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Tradingfloor.com and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Tradingfloor.com is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Tradingfloor.com or as a result of the use of the Tradingfloor.com. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. When trading through Tradingfloor.com your contracting Saxo Bank Group entity will be the counterparty to any trading entered into by you. Tradingfloor.com does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of ourtrading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws. Please read our disclaimers:
- Notification on Non-Independent Invetment Research
- Full disclaimer

Check your inbox for a mail from us to fully activate your profile. No mail? Have us re-send your verification mail