Alibaba Group () is due to report earnings on Jan. 28 before the market opens, and analysts have high hopes for the stock. Earnings are expected to come in at , and revenue is forecast to show 22% improvement year-over-year.
Zachs Investment Group to a “Buy” on Monday with a $79 price target, while Morgan Stanley recently on Alibaba stock from $101 to $115. But rather than buy BABA at current levels of $69.72, I prefer to sell put options to position to be a buyer of BABA stock at $59.05, or a 15% discount.
Technically, Alibaba stock seems to have found its footing, with the price action from Jan. 20 looking especially encouraging. Shares of BABA traded down to $65.34 on that day, only to reverse course and close at $68.71 — a solid 5.15% rally off the lows. This type of price reversal is many times indicative of a short-term low in share prices.
Fundamentally, Alibaba stock is trading at a price-to-earnings ratio of 19, which is in line with the overall market. With revenues expected to grow at a robust 22%, paying 19 times earnings is comparatively cheap.
Fears of a slowdown in China have previously weighed on BABA stock, but BABA’s recent outperformance in compared to the S&P 500 further highlights the relative attractiveness of Alibaba stock on a valuation basis.
The fears of a slowdown in China have certainly found their way into the options market, with implied volatility (IV) at the highest levels ever for BABA. This heightened IV is many times a reliable contrarian bullish indicator, and also means that option prices are very expensive, making option-selling strategies more rewarding.
Alibaba Stock Options
To position to be a buyer of Alibaba stock at lower levels, I would look to sell Alibaba stock using the Feb $60 put at 95 cents. This means you would be obligated to buy 100 shares of BABA stock at $60 for each put option sold. Factoring in the 95-cent initial credit received for selling the Feb $60 put makes the net cost $59.05, which is a 15.30% discount Alibaba’s current levels around $69.80.
The $59.05 net entry price would be just 2.89% above BABA stock’s all-time low. As I mentioned in a , it’s a great entry level for Alibaba stock.
So, for investors looking to be a buyer of BABA on further weakness, the options market can provide a very viable way to get paid now while positioning to be a buyer on a dip.
As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the can email Tim at tbiggam@deltaderivatives.com.
