Alibaba Stock and Its Recent Market Movements

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Last week I wrote an article about a short term opportunity I saw in the Alibaba stock (BABA). My main idea in that article is that the stock might have hit a short term bottom for now and the price development during the last week confirms this. Still we have to see if the stock will go to and surpass the $180 level which I see as a pivotal point in its way upward. To summarize the article:

  • there are fundamental factors which weigh on the current price performance of the Alibaba stock;
  • moreover, there are political risks that put a great deal of uncertainty on how the company will develop itself;
  • technically the stock might have hit a recent bottom around $150 and could jump upward from there in short term;
  • an options position capitalizing on the expectations of such a short term price increase could prove to be beneficial.

What happened during the last 10 days?

Initially, after the article above was published, the Alibaba stock started to trade lower and almost reached its previous bottom (closed around $158 on August 27). The next 5 days the stock’s price advanced to reach almost $180 on Thursday last week. That was a suitable time to sell the CALL option expiring Sep. 3 for a profit. I didn’t do it and it expired worthless at the end of the next day but the risk was known and manageable as part of the whole capital available.

What next?

Now we wait for the next expiration date (Sep. 10) which currently seems to have a much higher probability to be reached and the option to get in-the-money. Let’s examine the graph.

Both the MACD and Stochastic (those blue/red lines below the price part of the graph) show the price could continue to climb higher. But as practice has thought me, one should never rely on graph only without a proper risk management system. The Sep. 10 options is currently priced at about $0.55 so maximum loss for a Sep. 10 CALL position here of 1 lot – $55 at the current price of $0.55 per option. Depending on how fast the $180 price is reached and surpassed a return of something between $1.50 to $2-3 could be expected, that is $150 to $200-300 per one option contract bought. If those ranges are reached, a reward of at least 3 times the invested amount could be realized which is in line with my current risk/reward practice. Looking at the graph the first stopping point of the price should be around $180 and if surpassed the road leads to $183-184 range. This would have its positive effect on the CALL options and the sooner those prices are reached, the stronger the effect would be.

Why am I writing this?

I am a firm believer in learning by example. Gaining financial freedom should not be only a solitary act although for the most time it is. We all come from different backgrounds and we have different experiences. We also are different types of people. The tactics described above could and will not be suitable for everyone. Actively managing a portfolio or capital and being in the search for Alpha could feel tiresome and not always worthy. The idea of this post is to show the mind process and some of the decisions I undertake when entering and exiting short term options positions. It is not and is not meant to be an investment advice and it does not constitute an offer to sell, buy or in any other way trade securities, options or whatever financial instrument comes to mind. Trading involves risk and successfully managing risk through time is a key factor for a long term success. As it is in life in general, too.

There will be a continuation of this post after the next week ends 🙂


Cover photo by Kristina V.

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