BABA Analysis

Update 11/18/2015: BABA rose beyond its profit zone after earnings were published and never returned to a money-making state. I exited during expiration week.

Shares rose by 31.9% over 55 days, or a +212% annual rate. The options positon produced a -58.5% loss on debit for a -388% annual rate.

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The online and mobile commerce company Alibaba Group Holding Ltd. (BABA), headquartered in Hangzhou, China with principal trading in New York, closed below its 20-day price channel on Wednesday, sending a bear signal with high historical odds of success, suggesting a directional trade.

[BABA in Wikipedia]

BABA

I shall use the NOV series of options, which trades for the last time 57 days hence, on Nov. 20.

Odds

BABA completed four bear signals in the past 12 months. Three were successful, each on average yielding 10% over 62 days. The one unsuccessful signal lost 14% over 15 days.

The success rate was 75%.

Ranges

Click on chart to enlarge.

BABA at 10:50 a.m. New York time, 1 year daily bars, with implied volatility

Implied volatility stands at 51.3%, which is 2.1 times the VIX, a measure of volatility of the S&P 500 index. BABA’s volatility stands in the 85th percentile of its annual range.

Ranges implied by options and the chart

Week	SD1 68.2%	SD2 95%	Chart	Earns
Upper	70.10	81.90	95.06	N/A
Lower	46.48	34.68	58.00	N/A
Gain/loss	20.3%	40.5%

Implied volatility 1 and 2 standard deviations; chart support and resistance, maximum earns move
The Trade

Bear call spread, short the $60 calls and long the $62.5 calls,
sold for a credit and expiring Nov. 21.
Probability of expiring out-of-the-money

NOV	Strike	OTM
	60	58.09%

The premium is $1.05 which is 42% of the width of the position’s wings. The stock at the time of purchase was priced at $58.58.

The risk/reward ratio is 1.3:1.

Decision for My Account

I've opened a bear call spread on BABA as described above. The company publishes earnings on Nov. 4.

-- Tim Bovee, Portland, Oregon, Sept. 24, 2015

References

My volatility trading rules can be read here.


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Disclaimer

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.

No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decisions for his or her own account, and take responsibility for the consequences.

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Based on a work at www.timbovee.com.