Its midweek again but I am not coming up with contrarian trades today as I have been doing in the last couple of months. Today, I think it is expedient to revisit one of our previous options trades with a view to maximizing our profits and minimizing any losses.
To start with, let us revisit our Alibaba Group Holding Ltd (NYSE:BABA) options. I last wrote about trading BABA options on November 4 in a post titled “Alibaba is Hot, But BABA Calls are Hotter”. In that post, I examined the impressive earnings result that Alibaba presented and I inferred that the stock had upside potential ahead based on the bullish momentum from the earnings beat.
In that piece, I recommended buying the BABA Jan 2015 110.000 call (BABA150117C00110000) at an asking price of $4.90. Interestingly, shares of Alibaba were trading around $104.78 when I wrote that piece.
As at market open today shares Alibaba opened up at $115.85 per share to mark a 9.31% gain within a week. Interestingly, the BABA 110 call I recommended at an asking price of $4.90 has gained 118.36% to open at $10.70 today.
How to Trade BABA Options
If you are still holding the aforementioned BABA call options, it is obvious that you have already missed an opportunity to take home the highest gains from BABA options. For one, shares of Alibaba soared to a new all-time high of $119.45 on Monday on the strength of impressive sales on Singles Day in China. More so, the said call options traded as high as $14.20 per contract before falling to the current $10.70 price.
However, not all hope is lost to take away gains from BABA stock and options. Active options traders would have sold their BABA options at the highest price on Monday or yesterday when the decline started. If you’d rather take your gains and run, you could just sell to close your position in the options and go home with your 118.36% gains.
Nonetheless, the optimist in me perceives that we might see yet another lap of the bullish rally before the end of this week. Hence, it might be smart to risk losing $0.10 (or lower) by setting a stop/limit order at $10.60 while opening ourselves up to further upside on the contract. In the worst possible scenario, you’ll lose $0.10 on the contract before the sell order is executed and you will go home with gains of 116.32% as opposed to gains of 118.36%.
Are You New to BABA Options?
If you are new to the BABA party, you should not be stuck in a limbo because BABA options offer everybody a chance to make profits if you position yourself in the right camp. Alibaba’s RSI Index of 76.15 suggests that the stock is in “overbought” territory; hence, a little dance in the bear den with a pullback is to be expected.
I recommend buying the BABA Jan 2015 105.000 put (BABA150117P00105000) at an asking price of $4.04. The contract effectively sets us up for a breakeven when shares of Alibaba drop to $109.04. However, given the relationship between Alibaba and its options, we can expect the contract to soar higher even before the stock drops to $109.
— Daily Option Alerts