Alibaba: The Honeymoon Has Ended, Buy BABA Puts

Alibaba Group Holding Limited (NYSE:BABA) with its market capitalization of $220.88B is a China-based online and mobile commerce company in retail and wholesale trade, as well as cloud computing and other services. The Company provides technology and services to enable consumers, merchants, and other participants to conduct commerce in its ecosystem.

The Company provides the fundamental technology infrastructure and marketing reach to help businesses leverage the power of the Internet to establish an online presence and conduct commerce with consumers and businesses.

I wrote extensively about trading Alibaba options last year soon after the company made its debut in the U.S. equity markets via IPO. On November 4, I recommended buying BABA call options and the contract soared from $4.90 to $10.70 before we sold it. Later on November 12, I recommended you switch camps and buy BABA Puts.

I recommended the BABA Jan 2015 105 Put contract that was set up for a breakeven when shares of Alibaba drop to $109.04. As at January 23, when the put options expired, shares of Alibaba were trading around $103.10, well above the contract’s breakeven point of $109.04.

Alibaba Making Recent Waves

Alibaba reported its Q3 2015 results today and the content of the earnings release provides enough information that could provide insight into how the shares of Alibaba should be traded. Highlights of the quarterly results are presented below:

Alibaba reported a 40% increase in revenue to $4.22 billion. However, the revenue came short of the consensus analysts’ estimate of $4.42B

The company reported earnings of $0.81 per share to beat the consensus estimate of $0.74 per share

Gross merchandise volume across the company’s China retail marketplaces grew 49% year on year

Alibaba reports that annual active buyers increased to 334 million in 2014, an increase of 45% year on year
The company added 48 million active users sequentially and delivered over US$1 billion in mobile revenue during the quarter

Is Alibaba a Bull or a Bear?

BABA Chart

The chart above shows how the shares of Alibaba have traded since its IPO. You will observe that the stock instantly gained 36.32% from an IPO price of $68 per share to an opening price of $92.70. From that $92.70 opening price, the stock went on to set a 52-week high of $120 per share. Now the stock is taking a hit as it registers a 10.07% loss to $88.54 per share as at 11:17 AM EST.

The first major reason that could be advanced for the correction being recorded in Alibaba is the company’s inability to meet the analysts’ expectation on revenue. The second reason that could be advanced for the correction is Yahoo (YHOO)’s announcement that it would spin off its stake in Alibaba into an independent registered investment company named SpinCo.

However, none of the two reasons advanced above should logically precipitate a 10% drop in a company with impressive earnings and revenue. I posit that the main reason behind the decline in Alibaba other than the aforementioned, is that investors’ honeymoon with Jack Ma has ended and they are beginning to see the stock more realistically.

How to Trade BABA Options

If the decline continues tomorrow, I posit that we can expect the stock to find a semblance of stability around +10 of its IPO price or -10% of its first opening price after the IPO . Hence, the sweet spot for Alibaba is somewhere around $72.40 and $82.80.

I am camping with the bears on Alibaba until the stock finds support and then, we can start trading BABA options based on its technical and business fundamentals. I recommend buying the BABA Mar 2015 82.500 put (BABA150320P00082500) at an asking price of $1.80. You should also monitor the BABA Mar 2015 75.000 put (BABA150320P00075000) and buy the contract as soon as the $82.80 support is breached.


— Daily Option Alerts

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