Last June, Alibaba Group Holding’s BABA -0.25817555938037867% Alibaba Group Holding Ltd. ADR U.S.: NYSE USD139.08 -0.36 -0.25817555938037867% /Date(1497301226288-0500)/ Volume (Delayed 15m) : 31881391 AFTER HOURS USD139.6 0.52 0.3738855335058959% Volume (Delayed 15m) : 296208 P/E Ratio 55.58086560364465 Market Cap 352783206176.758 Dividend Yield N/A Rev. per Employee 643931 More quote details and news » founder, Jack Ma, complained to a Chinese-language newspaper that American investors did not understand his company. It turned out to be a great opportunity to buy the stock. At the time, it was trading around $76, and investors were struggling to understand the company’s operations.
A lot has happened in the past year.
Alibaba (ticker: BABA) ended an investor meeting last week that proves the company has become quite expert during the past year at explaining itself to American investors. During the two-day meeting, the company said Gross Merchandise Volume could reach $1 trillion by 2020 from $547 billion in 2016. Projected revenue growth was pegged at 45% and 49% in 2018.
In short, Jack Ma, the company’s founder, said the company was still a baby compared to what it could become in the future.
Alibaba’s stock is now trading around $140, and few investors would argue that the company’s parts—e-commerce, logistics, financial services, and others—are more valuable than the stock price suggests. They also increasingly agree with our long-enunciated view that Alibaba is a key holding for anyone who wants to profit from the rise of China’s middle class.
Readers of this column were properly positioned for the investor event and have profited handsomely as the stock charged to a new high. We had advised investors when Alibaba’s stock was at $123.94 to sell the June $122 put option for $2.45 and to buy the June $125 call option for $3.10. The put was recently trading at nine cents, and the call is worth $17.25.
Investors should now lock in profits and reset the trade by selling another put to position to buy the stock on a decline. The September $135 put was recently trading at $6.53. At the same time, investors can buy the September $140 call for $8.80. The trade’s net cost of $2.27 positions investors to profit from any rallies above $142.27, while enabling them to buy the stock at $135.
The September expiration was selected in anticipation that seasonality prompts investors to look abroad at the very time that U.S. stocks usually start to exhibit volatility. Major market declines have historically occurred in October, which tends to mean that September is a month of dread. Should this pattern remain intact, Alibaba could benefit as investors look for safe places to invest.
While Alibaba’s options-trading patterns have largely suggested that money managers were using a conservative approach to managing positions, we are starting to see the onset of momentum-trading strategies.
When Alibaba’s stock popped some 13% last week to just below $150 on earnings guidance, one investor bought 4,000 August $150 calls and sold 4,000 January $175 calls for $2.40. The strategy indicates the investor is willing to sell stock above $175 to capture a rally above $150. The trade proves profitable if Alibaba’s stock keeps moving into record-high territory. During the past 52 weeks, the stock has ranged from $73.30 to $148.29.
Aggressive trading strategies have thus far been rather uncommon. Most investors have used options to express fundamental views on the stock. Put sales have been popular, as has just buying upside calls. The emergence of momentum strategies merits monitoring as it suggests a shift in how investors view the stock—and that could make it more volatile than in the past.
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