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JD.Com Inc(ADR) (NASDAQ: JD ) started 2017 with a bang, but then it tripped. It rose 90% by August, but it has since settled about half way. While the 50% retracement of the rally is disappointing, it actually lays a stronger foundation for future upside in JD stock.
Source: Daniel Cukier via Flickr
Behind only Alibaba Group Holding Ltd (NYSE: BABA ), JD is a formidable e-tailer and that is where shopping is headed: online.
Year-to-date and even after the August dip, JD stock is still up 60%, so it's by no means struggling. Dips are normal and often they are opportunities for those who want to participate.
Today, we hear that the Singles' Day shopping event shattered the records. JD sold $19 billion worth of merchandise in one week. This pales compared to BABA's $25 billion in one day, but it is still impressive. The company spread the event over a whole week to give itself a better chance for execution, which shows maturity by its leadership.
Since May, JD stock has been consolidating around a base of $38-per-share. This is how bulls build a new platform to reset another rally for higher highs. And therein lies my opportunity: I will risk money against those bases that investors build.
JD stock is a momentum play, which is tricky to invest using traditional methods. Momentum stocks move so fast that they scare most investors from participating for fear of being too early or late. So, today I will use JD options to accomplish my goals.
Although I want to profit from a rally in JD stock, I don't want to rely on it.
Here's How to Play JD Stock
By using options, I can set a bullish trade that leaves me with a sizeable margin for error. This is what I like to do when the equity markets are so extended and when there is political unrest brewing all over the globe. I don't expect an imminent disaster, but I'd like some cover just in case one comes.
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However, this also makes it important to hold the $38 zone, or else it could become a trap door to target $32. This is not a forecast, but I do have to recognize the potential.
Fundamentally, JD is not profitable yet, but experts on Wall Street have high expectations. It is currently trading mid-range of their price targets and most analysts have a "buy" rating on it.
The Trade: Sell the JD Mar 2018 $35 put and collect $1.25 to open. Here, I have an 85% theoretical chance that I would retain maximum gains. But if the price falls through my support, then I will own shares and accrue losses below $33.75.
Selling naked puts carries big risk, especially in momentum stocks with high ticket prices. For those who want to mitigate it, they can sell a spread instead.
The Alternate Trade: Sell the JD Mar 2018 $35/$33 credit put spread. Here, I have about the same odds of winning. If so, the spread would deliver 20% yield on risk.
Ultimately, regardless of how careful I am, investing in stocks is fraught with danger, so I never risk more than I am willing to lose
Get my newsletter for free here . Nicolas Chahine is the managing director of SellSpreads.com . As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on twitter and stocktwits .
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