Buying A Put Option On Alibaba (BABA)

| March 4, 2015 | 2 Comments

BABA optionsBuying A Put Option On Alibaba (BABA)

Trading or investing in Chinese stocks can be a highly rewarding proposition, but can also offer heavy risks.  On one hand, it’s hard to understate the growth potential of most businesses in China.  On the other hand, it’s difficult to trust the numbers coming from the region.

The biggest problem is China doesn’t have the same standards as the US in regard to accounting accuracy.  At least, the accounting rules don’t seem to be as effectively enforced in China.  Not to mention, a Chinese company may report different numbers in China than they do in the US.

Still, there are some good opportunities with Chinese stocks due to the massive size of the domestic market.  Not to mention, cheap labor means domestic companies can earn some big time profits.

So what do you do with a company like Alibaba (BABA)?

Alibaba is China’s version of Amazon (AMZN). It’s a massive online commerce company with $11 billion in annual revenues and $4 billion in profits.  BABA has been public for around six months in the US and has a market cap of over $200 billion.

Currently, BABA is trading at $81.32, down 19% on the year.  That’s 2% below the previous 52-week low of $82.81, and 32% from the 52-week high of $120.00.

So is now the time to buy a put option on BABA?

As a reminder, a put option makes money when the underlying stock goes down.  Is BABA going to continue to fall?

For a more in-depth look at BABA, you can check here.

Here’s the deal…

Alibaba had one of the biggest IPOs of our time, and has been a popular investment overall.  However, the company has hit some serious headwinds of late and the stock has plunged to new lows.

First off, BABA has often been plagued by accusations of fake merchandise, such as knock-off luxury goods.  Now the Wall Street Journal is suggesting some orders may be fake as well.  If that’s the case, then actual sales numbers reported could be false.

Clearly, that’s a reason for investors to be worried.  And that’s not all…

The lockup period for BABA shares is about to end.  Those investors who cashed in on the IPO may be in a hurry to dump shares while the stock is still trading at its current levels.  In other words, there could be a flood of sell orders coming in soon.

Here’s the chart of BABA:

put option buying opportunity, a chart of BABA

As you can see above, the stock has been in a major downtrend since the peak last November.  It’s now back to roughly IPO levels.

Now could be a great time to buy a BABA put option.

BABA is in trouble, at least in the short-term.  I believe between the fake orders accusations and the looming end to the lockup period, there could be significant downside ahead.

As such, buying a short-term April put is in order.  The April (17th) 80 puts are trading a little over $3 right now.  That’s a reasonable price to pay given the stock’s downside potential.  Plus, there are still about six weeks to expiration.

Yours in Profit,

Gordon Lewis

Note:  Gordon Lewis has been trading options for more than 15 years and he now writes and edits for Optionstradingresearch.com.  You can sign up for the newsletter and get a free research report. We are your go-to source for top notch options trading research.

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Category: Call Or Put Options?

About the Author ()

Gordon Lewis is the Chief Investment Strategist and editor for the popular daily newsletter – Options Trading Research. He’s also editor of our dynamic theme-based options trading service, Advanced Options Adviser, and one of the key analysts behind the highly successful Options Trading Wire.

Comments (2)

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  1. amit says:

    your recommendation on BABA didn’t fare well today Apr 17 $80 PUT down by $1.16. Do you still think this is a good idea?

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