Wednesday, January 28, 2015

BABA: Volatility play

Update 2/14/2015: Shares declined by 9.8% over the lifespan of the position, for a +513% annual rate. The options produced a 286.0% loss on debit, a -14,913% annual rate.

The Chinese online and mobile commerce company Alibaba Group Holding Ltd. (BABA), headquartered in Hangzhou, China, publishes before after the opening bell on Wednesday, Jan. 29.

BABA has Weeklys among its options inventory, and I shall trade the FEB1 series of options, which trades for the last time on Feb. 6, nine days hence.

[BABA in Wikipedia]



Implied volatility stands at 42%, in the 100th percentile of the rise from 36% on Jan. 23.

Ranges implied by options and the chart
WeekSD1 68.2%SD2 95%Chart
Implied volatility 1 and 2 standard deviations; chart support and resistance


Click on chart to enlarge.
BABA at 10:50 a.m. New York time, 2 months 3 weeks, hourly bars
After its initial public offering in September 2014, BABA hit a peak of $120 on Nov. 13, 2014 before beginning a decline that made its most recent lower low on Jan. 16 at $95.92. From that point it reversed, rising to$105.20 by Jan. 23, then reversed again to a higher low and is today again on the rise in the first half hour of trading.

Zacks Investment Research gives BABA its most second most bullish rating. The enthusiasm rating among analysts is 91%, unchanged down from a month earlier. Of analysts following BABA, 91% rate it a strong buy, the strongest bullish rating. I'm rating the 30-day trend as falling and the intra-day trend to be rising.

Combining the Zacks rating, enthusiasm index, the percentage of strong bulls and the chart trends produces a directional score of 3, which argues for a bull play.

I shall structure my trade as a bull put spread.

The Trade

Bull put spread, short the $95 puts and long the $93 puts
sold for a credit and expiring Feb. u
Probability of expiring out-of-the-money


The risk/reward ratio stands at 3:1.

Decision for My Account

I've opened a bull position in BABA as described above.

-- Tim Bovee, Portland, Oregon, Jan. 28, 2015


My volatility trading rules can be read here. For a discussion of the rationale behind the rules, see my essay, "Rules for very short term trades".

The directional score is calculated as the sum of the following:
  • Zacks rating --The Zacks ratings are translated as follows: 1=2, 2=1, 3=0, 4=-1 and 5=-2.
  • Enthusiasm rating --: A single percentage derived from the number of analysts whose opinions are in one of five categories: Strong buy, buy, hold, sell and strong sell.
  • Strong buy share -- The percentage of all analysts who rank the stock strong buy. If the share is 60% or greater, the score is 1; if 40% or less, then the score is -1; otherwise, the score is zero.
  • Ethusiasm momentum -- The score is 1 if today’s enthusiasm rating is larger than the rating 30 days earlier; otherwise, the score is zero.
  • 30-day direction -- The trend that best describes the 30-day chart: 1 for an uptrend, -1 for a downtrend and zero for a sideways trend.
  • One-day direction -- The trend that best describes the one-day chart: 1 for an uptrend, -1 for a downtrend and zero for a sideways trend.
From time to time I use the number 68.2% in using applied volatility to calculate the expected trading range. This comes from statistics and refers to the one standard deviation boundaries, which are expected to contain 68.2% of whatever is being studied. Putting it another way, given an item (a trade or whatever), there is a 68.2% chance that it will appear within those boundaries.

Elliott wave analysis tracks patterns in price movements. The principal practitioner of Elliott wave analysis is Robert Prechter at Elliott Wave International. His book, Elliott Wave Principle, is a must-read for people interested in this form of analysis, as is his most recent publication, Visual Guide to Elliott Wave Trading

Several web sites summarize Elliott wave theory, among them, Investopedia, StockCharts and Wikipedia.


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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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