It’s time for another earnings report from Chinese ecommerce behemoth Alibaba (NYSE:BABA). The company steps into the earnings fray next week, and BABA stock finds itself once again trading at multi-month lows. And, once again, this is a bullish opportunity for BABA stock traders.
Specifically, BABA stock is in a situation very similar to what we saw back in April. We have U.S.-China trade war tensions and continued doubts about the strength of the Chinese economy. To be sure, the recent Chinese economic data shows a bit of a slowdown, with retail sales rising only 8.8% versus expectations for a 9% growth clip. Still, an 8.8% year-over-year growth rate is impressive, and it will show in Alibaba’s bottom line.
But we’ve seen this scenario before — last year in fact when there were no tariffs to worry about. And, once again, Alibaba will rebound and rally higher once the company’s quarterly earnings report puts those fears to rest.
In fact, shares of Alibaba are poised to rally back above $170 today, as bargain hunters step in to increase their holdings or finally add Jack Ma’s behemoth to their portfolios.
This is exactly what you should be doing right now. BABA stock is trading oversold, with its relative-strength index (RSI) dipping below 30.
Furthermore, the next significant level of technical resistance doesn’t emerge until the $186 area, where it’s 200-day moving average rests. That’s a nearly 9.5% upside before hitting any turbulence.
But, with sentiment heavily negative on BABA stock right now, I believe that real resistance won’t emerge until the $200 area. Why? Because that bearish sentiment represents sideline money that could be brought to bear on BABA stock following earnings.
In short, as BABA breaks above its 200-day trendline, an influx of buying should help extend that rally — like it did back in April.
Looking at quarterly expectations, analysts are projecting a profit of $1.21 per share, up from $1.16 per share last year. Revenue is expected to soar 59.6% to $11.69 billion. EarningsWhispers.com puts quarterly earnings at $1.27 per share.
Topping those figures and breaking out above technical resistance could put a crimp in short sellers’ plans. As of the most recent reporting period, some 11.5% of BABA stock’s float is sold short. This large short position is likely due to worsening sentiment surrounding the U.S.-China trade war situation.
But while the U.S. market is important to Alibaba, remember that it has the rest of the world to play in. This includes the red-hot Indian market, which U.S. firms have had some trouble getting off the ground in. As such, these BABA shorts are in danger of getting squeezed out of their positions if the company shows little or no signs of slowing down in its current growth rate.
Turning to the options pits, short-term BABA options traders are bullish on the stock. Currently, the weekly Aug 31 put/call open interest ratio comes in at 0.49, with calls more than doubling puts among near-term options.
If short sellers are taking precautions, some of these calls will be hedges to limit losses. If no, that will leave them at additional risk to upside pain, increasing the severity of any squeeze situation.
Finally, Aug. 31 implied volatility is pricing in a potential post-earnings move of about 8% for Alibaba stock. This places the upper bound at $184, while the lower bound lies at $155.
2 Trades for Alibaba Stock
Call Spread: The recent drop in BABA stock is a buying opportunity heading into earnings. Options traders looking to capitalize on the situation might want to consider an Aug 31 $180/$185 bull call spread.
At last check, this spread was offered at $1.48, or $148 per pair of contracts. Breakeven lies at $181.48, while a maximum profit of $3.52, or $352 per pair of contracts — a potential return of 196% — is possible if BABA stock closes at or above $185 when Aug 31 options expire.
Put Sell: If a more neutral strategy fits your trading style, then an Aug 31 $150 put has considerable potential for finishing out of the money. At last check, this put was bid at 51 cents, or $51 per pair of contracts.
As long as Alibaba stock trades above $150 through expiration, traders pursuing this strategy will keep the $135 premium. However, if BABA trades below $150 ahead of expiration, you could be assigned 100 shares for each contract sold at a price of $150 per share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
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