Monday, August 10, 2015

BABA Analysis

Update 8/22/2015: My calls expired Saturday. Shares fell 10.3% over 27 days, or a -142% annual rate. The options produced a 28.4% yield on debit for a +391% annual rate.

Update 8/19/2015: BABA moved below the profit zone with only a few days left until expiration. I sold the puts in the iron condor, transforming the position into a bear call spread. I'll calculate profit and loss once the calls expire, wrapping up the entire position.

Update 8/11/2015; I've opened a position in BABA structured as described below.

The premium is $0.86, which is 22% of the width of the position’s wings.The stock at the time of entry was priced at $78.72.

The risk/reward ratio is 3.6:1.

The online and mobile commerce company Alibaba Group Holding Ltd. (BABA), headquartered in Hangzhou, China with principal trading in New York, publishes earnings on Wednesday before the opening bell.

[BABA in Wikipedia]


I shall use the AUG monthly series of options, which trades for the last time 10 days hence, on Aug. 21.


Click on chart to enlarge.
BABA after July 10 close, 30 days hourly bars
Implied volatility stands at 37.7%, which is 3.1 times the VIX, a measure of volatility of the S&P 500 index. BABA’s volatility stands in the 70th percentile of its most recent rise.

Ranges implied by options and the chart
WeekSD1 68.2%SD2 95%ChartEarns
Implied volatility 1 and 2 standard deviations; chart support and resistance, maximum earns move

The Trade

The structure of the proposed trade covers the one standard deviation and chart ranges, but not all of the maximum earnings movement range. However, it does cover the average earnings movement range of $86.81 to $74.13.

Iron condor, short the $87 calls and long the $91 calls,
short the $73 puts and long the $69 puts,
sold for a credit and expiring Aug. 22.
Probability of expiring out-of-the-money


The premium is $0.75, which is 19% of the width of the position’s wings.The stock at the time of analysis was priced at $80.47.

The risk/reward ratio is 4.3:1.

The zone of profit in the proposed trade covers a $7 move either way. The biggest immediate move after each of the past four earnings announcements was $8.64, and the average was $6.34.

Decision for My Account

I'm posting this analysis prior to Tuesday's market open because I'm filing from East Asia, where the U.S. markets are open at night. I intend to open a position as described above if present conditions continue into Tuesday's trading and shall post an update once I've made the final decision.

-- Tim Bovee, Fukuoka, Japan, Aug. 11, 2015


My volatility trading rules can be read here.


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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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