A Trade to Get Long Alibaba Post Earnings

• Posted by Greg Harmon
• on August 10th, 2016

Alibaba ($BABA) spent a lot of time embroiled with Yahoo over the past 18 months. The stock price went through some wild swings as the story played out. But since the sale of Yahoo assets the price of Alibaba stock has been rising. In mid July it reached resistance that has been holding it back since July last year.

The chart below shows that the stock pulled back from that level one last time to a higher low at the 20 day SMA, before a push higher that is taking through resistance into its earnings report Thursday morning. It has seen a 6% move in a little over a week. Momentum is starting to look a bit overbought with the RSI breaking 70, but the MACD is crossing up.

If you think the short term run could be a bit overdone like me, but like the stock for a longer term trade then one structure to use for the report is a 1×2 Put Spread. I choose a August monthly 87.5/85 1×2 Put Spread. This comes at no cost. It gives downside participation if the stock falls back to 85, where the maximum profit of $2.50 is attained. Below 85 you will be put the stock with a basis of 82.50.

I like this for a few reasons. First 85 is about the level of the recent break out, so a retest over the next 7 sessions is not a far fetched idea. Also the open interest in the August options is the largest at that strike. I would be happy to own this stock at 82.5. If it moves up I will have to reassess where a good entry might be.

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