Trade view /
31 August 2016 at 14:17 GMT
Alibaba holds most of the e-commerce market in China. In addition to being a platform for online trade of merchandise, it also owns a number of other business including a payment service similar to PayPal and a social app called Taobao.
Recently the stock got a lift following a strong Q1 earnings report and broke out of its 2-year $20 range. Since its peak at $98.35 shares have been quiet. We might be looking at another leg up and a potential for a $6-dollar run as the shares seem to be on the move again.
With the stock closing at $96 we could approach this trade with a combination order. The trade consists of a $90 November put and a $100 November call. The premium collected by selling the $90 is almost going to cover the purchase of the call. Moreover, the combination results in somewhat of synthetic stock position, albeit not dollar-for-dollar.
Source: Saxo Bank
By selling the November 90 puts this will give us a position equal to 30 shares of the underlying stock. Furthermore, buying the 100 calls will give us exposure to BABA share of an additional 41 (0.41 x 100 shares). Or a total exposure of 0.71 deltas or 71 shares.
Naturally we would benefit by the stock price rising and for every one dollar of a rise we would collect $0.71. Hence this is a bullish position from the get go. It is important to note that in the event of the shares moving below the short November 90 put, we might be assigned the shares at that price.
Management and risk description
To hedge the risk investors could buy a protective put along side the short put, such as $87.50. Or put aside cash to purchase the share of Alibaba at $90, if assigned the shares.
Underlying shares @ 96.31
Sell 1 November 90 put at $2.75
Buy 1 November 100 call at $3.65
Net debit (money out) $0.90 per contract
Maximum gain= unlimited
Maximum loss - potentially unlimited if shares of BABA go to zero
Breakeven (at expiration) = $100 + $0.90= $100.90
Stop: no stop
Time horizon: 1-2 months
— Edited by Clare MacCarthy
Non-independent investment research disclaimer applies. Read more