Chart of the Week


BABA Crazy

As most traders will probably recognize, the market has been moving predominantly higher since the middle of October after stocks declined in the first half of the month. Current market conditions seemed to be extended to the upside but there is little evidence so far that the market has a pullback in mind any time soon. Of course one or two negative events could quickly change that outlook.

That being said, there are still stocks that seem to disregard whatever the market is doing and do their own thing. It looks like Alibaba Group Holding Ltd. (BABA) may be one of those stocks. Since the stock first hit the market in September of this year, it has been progressively moving higher. It found some resistance in the $100 area but after several sessions of failing to close over the $100 mark it did and has not looked back.

The Chinese e-commerce giant just recently shattered last year’s record for Singles’ Day, processing $9.3 billion in total gross merchandise sales. The stock surprisingly gapped and closed lower on that day as seen on the chart. But what makes this chart interesting is what the stock did the next day. It formed a bullish engulfing candle and closed above the previous candles high. Whether a trader considers the engulfing candle as a bullish sign or considers the pullback and reversal higher as a bullish sign, it looks like it may want to continue to move higher. At the time of this writing, the stock was looking to challenge its all-time high. 



If you are an option trader and are debating whether to implement a bullish position on BABA, there are a few things to consider. Although the stock is relatively new to the market, the implied volatility of the options are also considered to be relatively low. When the IV is considered to be low, options are considered to be inexpensive compared to when IV is high. If an option trader was to consider a directional trade like a long call or a debit call spread, both positions are debit (long) positions that would take advantage of “cheap” options.

BABA has expirations that expire weekly so there are a plethora of options in which to choose from. If an option trader was considering purchasing long calls, he might want to consider purchasing an option or options that has a longer expiration to offset some of time decay (theta) compared to nearer-term expirations. If a debit call spread is considered, time decay (theta) is less of a factor due to the spread (long and short a call). An option trader should consider when and where the stock might move since maximum profit and loss are realized at expiration.

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