BABA Analysis

Update 1/6/2016: I exited my FEB optons BABA position for a profit, bringing to an end the four-position series for a small profit. It's an example of how to take a losing trade and convert it into a winning one.

Shares declined by 5.3% over 74 days, or a -28% annual rate. The options positions produced a 7.5% yield on debit for a +37% annual rate.

The complete series:

BABA	vertical
option	credit	debit	profit	yield	entry	exit	days
-c77.5dec (c80dec)	0.99	-2.15	-1.16	-54.0%	10/26/2015	12/1/2015	36
-c77.5dec4 (c80dec4)	2.05	-1.72	0.33	19.2%	12/1/2015	12/11/2015	10
-c77.5jan (c80jan)	1.43	-1.01	0.42	41.6%	12/11/2015	1/6/2016	26
-c80feb (c85feb)	1.68	-0.84	0.84	100.0%	1/6/2016	1/8/2016	2
-----------	-----------	-----------	-----------	-----------	-----------	-----------	-----------
Status:	6.15	-5.72	0.43	7.5%			74
option description key: long/short, call/put, strike, series

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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, publishes earnings on Tuesday before the opening bell.

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[BABA in Wikipedia]

BABA

I shall use the DEC series of options, which trades for the last time 53 days hence, on Dec. 18.

Ranges

Implied volatility stands at 50%, which is 3.3 times the VIX, a measure of volatility of the S&P 500 index. BABA’s volatility stands in the 87th percentile of its annual range.

Ranges implied by options and earnings

Week	SD1 68.2%	SD2 95%	Earns
Upper	90.35	104.92	84.51
Lower	61.30	46.92	67.23
Gain/loss	19.1%	39.2%

Implied volatility 1 and 2 standard deviations; maximum earns move
The Trade

I shall look a bear position based on strong analyst expectations of a negative earnings surprise.

Bear call spread, short the $77.50 calls and long the $80 calls,
sold for a credit and expiring Dec. 19.
Probability of expiring out-of-the-money

DEC	Strike	OTM
	77.5	58.7%

The premium is $0.99, which is 40% of the width of the position’s wings. The stock at the time of entry was priced at $75.86

The risk/reward ratio is 1.5:1.

The short strike is 36 cents above the price. The biggest immediate move after each of the past four earnings announcements was $8.64, and the average was $5.74.

Decision for My Account

I've opened a position on BABA as described above.

-- Tim Bovee, Portland, Oregon, Oct. 26, 2015

References

Tradecraft: Playing the odds to build winning stock market trades from options, a description of how I trade, 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.