Update – Alibaba (BABA) Booey

by CC August 24, 2018 1:52 pm • Trade Updates

Last week, Dan previewed Alibaba’s (BABA) FQ1 earnings (released last night) and detailed a defined risk bullish strategy. Following results the stock isn’t moving much at all, which isn’t great for a bullish directional trade that is long premium so I wanted to check in on the trade and determine the best course of action. To recap, here was the trade idea, from, August 17th:

BABA ($173) Buy Oct 175 – 205 Call Spread for $8

-Buy to open 1 Oct 175 call for $9.70

-Sell to open 1 Oct 205 call at $1.70

With the stock essentially in the same spot, implied vol has come in and this call spread is now worth about 7.10. So not terrible, but a little dicey if the stock fails to rally over the next few weeks. The breakeven on this trade is 183, 10 dollars higher to from a trade management standpoint we’d want to see some movement higher in the stock in the near term or a roll or taking it off for a small loss probably makes sense. That’s because this trade is out of the money with a much higher breakeven with the event now past, so the chance for wild swings in the stock are much less now than they were yesterday.

Therefore for management purposes it probably makes sense to watch the stock over the next few days for any signs of life to the upside and if now simply close. Potential rolls to greatly reduce the risk (and the outright bullishness of the position) would be to close the Oct 205 call (pay .80 to close) and roll that short strike down and nearer term to create a calendar. What strike to pick depends on how aggressive you want to be in reducing risk. Right now the Sept 182.5 call is trading around 2.80 and would reduce risk by $2. That new position would allow for profits if the stock went higher in the next month, and if the stock was below 182.50 on Sept expiration it would allow for unlimited profits into October expiration.