Alibaba Group Holding Ltd Surprise Rally

Alibaba is winning over skeptics, and this means it is time for investors to switch tactics, says Barron’s. Investors have long been advised to build a position in Alibaba by selling puts.

Alibaba now seen as a growth stock

One would likely be in an enviable position if they stayed steady during the stock swings.

“You effectively got the options market to pay you for establishing a stock position at sharply lower prices in one of China’s most intriguing companies,” the website’s report says.

The trade lets you take advantage of the widespread fear that existed in respect to the Chinese Internet giant, thus increasing the put prices. By selling puts, an investor would have indicated to the market that they were willing to purchase the stock at a lower price. So the investor got to buy the stock if it dropped below the put and keep the money for selling the put if the stock advanced. These put options give investors the right to sell shares of a company at a set price before a set expiration date.

For instance, Barron’s most recent recommendation to sell Alibaba’s January $70 puts for $5.05 before its  first-ever analyst meeting when the stock was at $76 generated a good profit. Since then, more investors appear to now see Alibaba as a growth stock.

Time to change strategies

Last week, the e-commerce giant reported amazing second quarter earnings, exceeding the expectations of analysts. Compared to last year, earnings increased 33%, while revenue increased 59%. The stock popped on the news, indicating that some investors were properly positioned into earnings.

After the earnings report, investors are now probably thinking about how to play catch-up with a company that is coming out as a must-own growth stock. Though Barron’s still likes selling puts, it wants to “evolve” its approach. So it now suggests buying call options, which give investors the ability to buy a stock at a set price within a specific period. Investors can buy the November $105 call that was offered at $2.87. For example, the call is worth $5 if the stock hits $110 (Alibaba’s stock is around $98).

Alibaba’s Nov. 11 “Singles Day” shopping event, which is typically a stock-moving event, is covered under the November expiration. This expiration may capture the third quarter earnings report as well, although the date has not announced yet, the report says.

On Monday, Alibaba shares closed down 1.1% at $97.17. Year to date, the stock is up almost 19%.

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About the Author

Aman Jain
Aman is MBA (Finance) with an experience on both Marketing and Finance side. He has worked as a Risk Analyst for AIR Worldwide, and is currently leading VeRa FinServ, a Financial Research firm. Favorite pastimes include watching science fiction movies, reviewing tech gadgets, playing PC games and cricket. - Email him at [email protected]

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