Alibaba, the Chinese e-commerce giant, will announce its earnings on Tuesday before the US market opens. Market participants are expecting a solid report; they expect the company to announce a 15.88 earning (adj., Chinese Yuan) per share, a 30.3% year-on-year growth, 159 billion (Chinese Yuan) in revenue, and a 36% year-on-year growth. Alibaba has beaten its EPS seven times out of eight, and in terms of its revenue during the past quarters, it’s beaten six times out of eight.
UKRAINE – 2020/01/26: In this photo illustration the Alibaba logo is seen displayed on a smartphone. … [+]
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In terms of analyst’s recommendations and according to Bloomberg data, there are sixty-two buys, two holds, and zero sell ratings. The target price is $247. The closing price for Alibaba as of Friday, February 7th was $216.
If you’re interested in Alibaba’s stock, one strategy is to utilise the option’s market as it limits the downside risk; which is true whether you choose a put option or a call option. A call option is a position that an investor takes when he or she expects the price to move higher, and typically investors choose a put option when they expect the stock to produce feeble numbers. The maximum loss is the cost of the option that an investor pays.
Typically, an earning report causes a sharp increase in volatility in the underlying stock. Therefore, assuming a position through an options trade could be one of the best strategies.
Having identified a bullish setup, an investor determines the price level of a stock and shops for the best strike price with their brokerage firm. The idea is to keep the option’s premium price as low as possible as the investor is not only betting on the price but also betting against time. If the premium is within 4% of the underlying price, the trade should have a better yield.
Considering the current expectations, a call option may be a favorable choice. Alibaba’s stock is not short of liquidity in the options market. When the stock price was trading at $217.50 with a strike price of $220 (February 28th expiration), the premium was approximately $6.50, or 3% of the stock price at the time. By choosing this option, an investor can purchase 100 shares of Alibaba at $220 by paying $655—the actual amount that one would pay to own 100 shares. This means the maximum loss will be $655; however, the investor only needs the price to increase to $226.55 to break-even, and any increase in this call option will be pure profit.
Now, here is an interesting fact about Alibaba’s stock price, during its previous earning period on November 11th, it moved approximately $5 (176 low to 182 high). Now, the stock’s Average True Range (ATR), a technical indicator, shows that the stock can move as much as $6.65. For a trader with a bullish viewpoint, a call option makes sense as long as the stock continues its uptrend for the next couple of days.
Alibaba daily chart shows average true range at 6.66 and this means stock can move on either side $6 … [+]
Overall, investors hope that Alibaba will cash more on its Singles’s Day in November which should help the company to ward off any pessimism from the on-going Cornovairus situation—the impact of which is inevitable in the upcoming quarter; and the firm will highly likely refer to it during their conference call. But for now, I am expecting the company to post some strong profit growth and robust sales numbers.
Disclosure: I hold a position in Alibaba