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Relatively speaking, the price action in Alibaba Group Holding Ltd (NYSE: BABA ) has been better than that of the general markets. Technically Alibaba stock is pricing in a measured move off a recent breakout that could end up challenging the all time highs.
Soon the company will report earnings and those can create temporary chaos as the short-term reaction is always more gambling than investing. We never know how Alibaba stock traders will react, regardless of the quality of the earnings.
Fundamentally, the BABA story has legs and the model looks like it's on rails. It's not cheap from a price-earnings perspective, but as long as the growth is there, Wall Street will give it a pass on that.
Having said that, committing $111 per share after such a run is risky to say the least. In addition, Alibaba stock rallied 28%-plus since December and +80% since the 2016 February low. So it's understandable that most investors would be scared to initiate new longs from here.
Click to Enlarge BABA being a momentum stock means that we almost never get a clear entry point. On the way up, it seem perpetually over done. On the way down, it looks like a falling machete.
For that reason, I prefer using the options markets to stage my entries. This way I don't have to risk $110 per share of my hard earned money buying BABA up here.
The Bet: Sell the BABA Jan 2018 $95 put. This is a bullish trade for which I collect $4 per share to open. I have a 75% theoretical chance of success, but if BABA falls below my strike, I would be willing to own the shares at that price. Anything below $91 would accrue losses for me.
I could balance this trade by selling an opposing $135 call and collect an additional $3 per contract, but in this case, I am willing to wait until I get a clear indication of buying exhaustion.
Selling naked puts is not suitable for all investors, so for a milder version, I would change this to be a sold credit put spread instead.
The Alternate: Sell BABA Jan 2018 $95/$92.50 credit put spread which is also bullish. Theoretically both versions have the same chances for success only this one has a finite risk profile. If successful the spread yields 25% on risk.
Learn options as easy as 1-2-3 in a personal 1on1 webinar 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 on Twitter at @racernic and stocktwits at @racernic .
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