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Alibaba Group Holding Ltd (NYSE: BABA ) is expected release its second-quarter earnings report near the middle of next week, and both Wall Street and options traders are leaning heavily bullish on BA BA stock ahead of the event.
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What's more, options traders are pricing in a post-earnings move of only about 4% for Alibaba stock, which is well below historical levels for the shares, creating an opportunity for an earnings-related options trade.
Digging into the numbers, Wall Street is looking for BABA stock to post a profit of 70 cents per share on revenue of $5.08 billion. While Alibaba has previously had trouble meeting expectations, last quarter marked a turnaround that should carry over into next week's report.
Wall Street certainly believes so, as Zacks data highlights 16 buy ratings for BABA, compared to just one hold and no sell ratings.
There is room for improvement, however, as the 12-month consensus price target of $114.09 represents a modest premium of only about 9.8% to yesterday's close.
Turning to the options pits, we find that speculative traders are just as bullish on BABA stock's short-term prospects. Currently, the October/November put/call open interest ratio comes in at 0.37, with calls nearly tripling puts among options set to expire within the next two months. This ratio slips to 0.35 when we look at just the weekly October 28 series - i.e. those options most affected by next week's earnings report.
Click to Enlarge As I noted above, weekly October 28 series implieds are only pricing in a potential post-earnings move of about 4.18% - which is historically low for Alibaba stock ahead of earnings. This places the upper bound at $107.66, while the lower bound lies at $99.02 from Tuesday's close. I would expect a post-earnings rally to push BABA to $110, if not above, while a decline should hold in the $98-$100 region.
2 Trades for BABA Stock
Call Spread: With earnings less than a week away, BABA stock is in the process of rebounding off support in the $100 region. This pullback marks an excellent entry point for a long position ahead of earnings. As such, traders looking join the bullish bandwagon might want to consider a Nov $105/$110 bull call spread.
At last check, this spread was offered at $1.82, or $182 per pair of contracts. Breakeven lies at $106.82, while a maximum profit of $3.18, or $318 per pair of contracts, is possible if Alibaba stock closes at or above $110 when November options expire.
Put Sell: If you are concerned about broad-market headwinds, then a BABA put sell may be a more neutral path toward profit. At last check, the weekly Oct 28 series $98 put was bid at 33 cents, or $33 per pair of contracts.
As long as BABA stock trades above $98 through expiration next Friday, traders pursuing this strategy will keep the $33 premium. However, if BABA trades below $98 ahead of expiration, you could be assigned 100 shares for each contract sold at a price of $98 per share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
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