While experts are talking about being in a correction, Alibaba Group Holding Ltd (NYSE:BABA) is up over 10% in 2018. Volatility is back and this is making traders nervous. The CBOE Volatility Index (VIX) after spending years around 12 is now exacting revenge on the bulls. But it is my opinion that without a new shoe to drop this is temporary. Solid global fundamentals are still in control and this too shall pass.
Fundamentally BABA stock is not cheap, but since it’s still a growth stock this is not the parameter that matters most. Once they mature and growth slows down then I’d insist on cheaper price-to-earnings ratios. Until then, they need to concentrate on extending their successes forward and better things will follow.
Last year, BABA management promised great things and they didn’t disappoint. Such emphatic company statements are rare and instill solid investor confidence. The stock price action reflects it. In the past 12 months, it is up three times more than the PowerShares QQQ Trust, Series 1 (ETF) (NASDAQ:QQQ) or say Apple Inc. (NASDAQ:AAPL).
Pivotal to my trade today is that even though we are off the all-time highs, I am still confident that the current macroeconomic conditions remain bullish. So I want to own Alibaba shares, especially if at a discount.
I could buy the shares outright but this would leave me no room for error. And since we do have political footballs coming in the next few months I am instead going to use Alibaba options to create profits. There I can build a price buffer just in case we hit a few more roadblocks. Eventually the U.S. tax advantages and the global growth stories will prevail.
Technically, Alibaba stock defended the $171 support zone almost ten times in the past few months, so it is a platform that the bulls can count on. I have profits from previous similar trades, so this one is a rinse and repeat setup where I create income out of thin air. The upside potential is available for the bulls if they want it all the way back to the highs.
Resistance could come around $194 per share.
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I am confident that owning BABA shares, especially at a discount from here, is not likely to be a disaster. Experts on Wall Street agree with me, as it is now trading below most of its official price targets. But the longer the price hangs at these low levels, the more likely it is that some of the analysts could lower their expectations and those headlines are a threat to BABA bulls.
I consider this a bet on technical price action but backed by solid company fundamentals, which is nice to have in this nervous stock market.
BABA Stock Trade Idea
The Bet: Sell the BABA MAR 29 $165 naked put for $1. This is a bullish trade where I have a 85% theoretical chance for maximum gains. Otherwise, I will own shares and accrue losses below $164.
Those who want to mitigate the risk that comes with selling naked puts can sell spreads instead. This is especially important when markets are this nervous.
The Alternate Bet: Sell the BABA MAR 29 $167.50/$165 credit put spread, which would deliver over 12% in yield but with much smaller risk. Both set ups have about the same odds of success and neither require a rally to win.
Ultimately, regardless of how careful I am, investing in stocks is fraught with danger, so I never risk more than I am willing to lose.
Get my newsletter for free 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 as @racernic on twitter and stocktwits.
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