How To Benefit From From Alibaba Group Holding Ltd Stock’s Latest Dip

Alibaba shares have surged 18% since late December, but investors who missed the rally must not worry. The stock has seen some correction lately, giving another opportunity to enter the stock and be a part of the growth story, according to Barron’s.

What makes Alibaba stock important?

Alibaba offers a good opportunity, but the stock is not an exception to the market’s normal patterns. Investors have started booking profits in the stock, which is why some correction can be seen.  The Chinese company posted extraordinary earnings last week, registering strong revenue growth based on its multi-prong strategy built on technology and data analysis.

The growth of China’s middle class, which is one of the largest phenomena, makes Alibaba stock important. The online retailer is benefiting from the virtuous cycle as there are more than 443 million active buyers, and the company attracts sellers looking for a large audience base.

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Alibaba’s selection of merchandise also encourages users to keep coming back to the platform. Mobile customers contributed 79% of its consolidated gross merchandise volume in the most recent full year, a sign that the firm continues to cater to the highest-growth customers at this stage.

How to trade the stock

Only recently, Barron’s suggested buying the upside out-of-the-money call option to benefit from the stock’s momentum, but now it suggests a change in strategy to take advantage of the stock’s weakness. Investors bullish on the stock should sell March Puts, says Barron’s. This strategy is deployed to buy the stock at a discount to the current market price.

“This is possible because selling a put obligates investors to buy the stock if the price drops below the put strike price,” says Barron’s.

Alibaba is trading at around $101, and investors can go short in Alibaba’s March $97.50 put for $1.94. This positions the investor to buy the stock at an effective price of $95.56.

“The risk is that the stock is far below the strike price at expiration,” says Barron’s.

If the stock is trading at $90 before the put expires in March, investors will have to cover that put at a higher price of $7.50 or buy the stock at the effective purchase price.

“The risk is real, but likely tempered by all of the sell-side analysts who are increasingly recommending Alibaba to their clients,” says Barron’s.

For instance, Goldman Sachs is expecting the stock to clock $131, whereas HSBC analysts have given a price target of $125.