Thursday, September 24, 2015

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.

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]


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


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%.


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
WeekSD1 68.2%SD2 95%ChartEarns
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


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


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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