In early May, Alibaba Group Holding’s stock was on the verge of super stardom that very few companies ever achieve in the stock market.
Alibaba’s (ticker: BABA) shares were trading around $195. The stock seemed poised to cross $200, and enter the stock market’s pantheon of world-class stocks with triple-digit share prices and product strategies that define commercial markets. Other stocks in this category include Apple (APPL), Amazon.com (AMZN), Alphabet (GOOG) and Netflix (NFLX).
But Alibaba’s old hobgoblin reasserted itself, and the company is now once more defined not by what it does, but by where it is based. Alibaba remains a proxy for China.
Investors are not really focused on a string of stock-friendly news and they are once more discounting Alibaba’s powerful business model — think of Amazon, eBay (EBAY), Goldman Sachs (GS), FedEx (FDX), PayPal (PYPL) and many other top companies rolled into one. Instead, investors remain focused on the fact that Alibaba is based in Hangzhou, China.
This is not unreasonable, per se, as the U.S.-China trade war that was supposed to end in the spring has dragged onward into summer and shows no signs of ending.
Now, with Alibaba’s stock trading around $159, down some 19% from the May high, the company faces one of its most critical earnings reports on Thursday.
If Alibaba’s business is as worthy of respect as analysts have been contending, the stock is likely to surge ever higher in response to earnings. A good report, and especially anything positive the company’s executives say about the future, would refocus investor attention on Alibaba’s diverse portfolio, and the power of the business, offsetting broad fears about the trade war’s impact on China’s economy and thus Alibaba’s business.
With the stock around $159, investors can buy Alibaba’s August $160 call that expires Friday, and sell the August $157.50 put that also expires Friday.
The risk reversal—that is buying a call and selling a put with a lower strike price but same expiration—generated a credit of 10 cents. In other words, anyone who agrees to buy Alibaba’s stock this week for $157.50, while participating in any rallies above $160, can get paid $10 for every contract that they trade.
(Calls increase in value when the associated security rises. Puts increase in value when the underlying security declines. An options contract represents 100 shares of the underlying stock. So, the 10-cent credit is multiplied by 100 to equal the total premium.)
The stock has ranged from $129.77 to $195.72 during the past 52 weeks. So far this year, the stock is up 16%, though it is down about 11% over the past year.
The risk to this trade is that Alibaba’s stock could buckle lower if the earnings report spooks investors. If the stock is at $150, for example, investors are obligated to buy the stock at the $157.50 put strike price, or to cover the put for $7.50. The risk is real, especially at a time when the trade war’s lack of resolution is a defining market fact.
Be cognizant of those heightened risks, which are likely mitigated over the long-term by the breadth and depth of Alibaba’s dominant position as a leading way to invest in the rise of China’s middle class.
Besides, as we recently noted, it also makes sense to consider a China-First strategy in anticipation that the trade war may prompt the nation’s citizens to increasingly turn inward, and favor Chinese goods and companies over others.
It is true that there is a lot of controversy around such sentiments, and the risk of the trade war may pale in comparison to the political protests that are now sweeping Hong Kong, but this is a fact: if not for those issues than the opportunity to buy Alibaba so far below the recent high price would not exist.
https://www.barrons.com/articles/alibaba-stock-could-pop-after-earnings-heres-how-to-play-it-with-options-51565687700
2019-08-13 09:15:00Z
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