Ali Baba (NYSE:BABA) had a tough few months. And the losses in BABA stock are even uglier compared to a larger market hitting record highs seemingly every day.
Falling next to everything else is forgivable. But probing the depths when all of your friends are turning a profit is a quick way to get the shareholders to abandon the ship. Today I have a BABA stock trade which allows us to avoid a directional bet altogether and capitalize on massive volatility instead.
Normally, I quickly pass stocks with price charts like Alibaba for several reasons. First, trying to gain gains from down trades has been incredibly tricky over the past few months. The influx of liquidity created by record fiscal stimulus and accommodative monetary policy, coupled with vaccine hopes, is causing bulls to run wild across the country.
Withdrawals have been rare, and when they do happen, they are fleeting. We are dealing with toothless teddy bears these days and until that changes I see little use in forcing short trades on the few tickers into downtrends.
Second, the BABA action grabbed the headlines. As a result, its stock price has undergone many swings overnight since its peak last October.
Excessive volatility increases the difficulty of directional trades, as any puff of positive or negative news can quickly override the technical reason I used to enter the trade.
Take Wednesday, for example. Despite the general downtrend and bearish price action, BABA jumped up to 7% after the Wall Street newspaper declared US-based investors “will not be prohibited from investing in Alibaba.”
Courting the volatility of BABA stocks
One of the advantages of trading options contracts is that you can bet directly on volatility. Instead of obsessing over the rise or fall of a stock, volatility trading instead focuses on the magnitude some movement. “How far?” and “how fast? “Become more pressing questions than” in which direction? But just like you wouldn’t want to buy or sell old stocks, you shouldn’t be playing volatility all the time.
Sometimes there is no benefit and the minimum reward is not worth the risk. Ultimately, it comes down to whether the options are cheap or expensive. In the case of BABA stocks, the premiums are inflated or rich. And that, more than anything, makes me consider a game of volatility.
For curious readers, the main reason for the high cost of options is the increased uncertainty surrounding all news. Traders readily offer the price of put and call options. We are going to use this to our advantage by selling them via an Iron Condor.
Free the Condor
The Iron Condor is a short, neutral volatility strategy that benefits as long as it stays within a range. This will also benefit if the volatility decreases in the BABA stock. Of all the stocks on my watchlist, Alibaba has one of the highest implied volatility rankings at the 54th percentile.
The exchange: Sell the bullish $ 200 / $ 195 sell spread in February for 60 cents and sell the bearish option $ 270 / $ 275 in February for 60 cents.
The entire position should be entered for a net credit of approximately $ 1.20. Think of it as a bet that Alibaba will be between $ 270 and $ 200 upon expiration. If so, you will get the maximum payout of $ 120 per contract. The maximum loss, along with the cost to trade, is $ 3.80. However, to take the loss, BABA would have to go above $ 275 or fall below $ 195. To minimize the loss, you can exit by pushing towards either level.
As of the publication date, Tyler Craig does not have (directly or indirectly) any position in any of the stocks mentioned in this article.
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