JD.com (JD) Powered

by Dan December 13, 2017 3:22 pm • Trade Ideas

Shares of JD.com (JD), the other Chinese e-commerce behemoth are up 5% today after Stifel internet analyst Scott Devitt initiated the stock with a Buy rating and a $48 twelve month price target, per Bloomberg:

Devitt… called it one of “two big winners” in a China e-commerce market estimated to be headed for $1 trillion in sales by 2019.

Devitt says JD is more structured player whose logistics assets are a key differentiator; sees opportunity to monetize growth of third-party marketplace through value-added services for merchants. Valuation looks attractive given growth prospects and potential for margin progression

Shares of JD are up 59% on the year, but down about 17% from its 52-week and all-time highs made in early August. Shares of JD’s larger competitor in China, Alibaba (BABA) are up 100% on the year and down only 8% from its 52-week and all-time highs made last month.

Options volume has exploded in JD today, with calls outpacing puts 4 to 1, but it looks like a lot of the call activity is closing in the Dec 40 and March 36 strikes. As always its very hard to take too much away from unusual options activity without intimate knowledge of the trades, the traders’ intent and what the options might be traded against. But in this example, the volume got me looking at the stock, and the one year chart is particularly interesting. Since its August highs, the stock has been in a well-defined downtrend, having today tested that downtrend for the third time in as many months, after making an apparent double bottom just below $36:


Playing for a breakout above the downtrend at this point seems like a bad idea given the charts recent history, but the potential for a check back to the high $30s, or merely a consolidation at technical resistance in the near term might offer traders who agree with Devitt’s bullish view on JD for 2018 to set up to own longer dated calls by selling shorted dated ones to help finance.

For instance, with the stock at $40.50 you could buy the Jan5th weekly / March 42 call calendar for $1.45

-Selling to open 1 Jan 5th weekly 42 call at 55 cents

-Buying to open 1 March 42 call for $2

Break-even on Jan 5th weekly expiration:

This trade performs best with a gradual move towards the 42 strike over the next few weeks. If JD is at or below 42 on Jan 5th weekly expiration the short Jan 5th 42 call will expire worthless and the and the trade will be left naked long the March 42 call. If JD is close to $42 then the March 42 call should have appreciated as it will have picked up deltas. At that point, it might make sense to further reduce the premium at risk by selling a higher strike call in March turning the trade into a vertical call spread. The max risk of this trade is the $1,45 premium paid, and would be at risk with a large move below the current level, or well below the 42 call strike.