Alibaba Group Holding Limited (BABA) was one of the largest IPO’s of 2014, (if not the largest one), as the company managed to raise impressive funds at its listing. However, months after prices almost reached the 120USD/share, sellers stepped in. Slowly but surely the stock fell to the current 89.00 level.
Is this a good level to buy call options on BABA? Well, the answer is two-folded.
First, trading equities is all about earnings, and the last quarter of 2015 earnings disappointed as they printed 55 cents a share on expectations of 62. The arguments were that BABA tried to diversify its investments in mobile and other new ventures, but in the end for markets only the fact that they missed the target matters.
This made the stock reach below the 90 level and it was the pure fundamentals factors that drove it there. Therefore until fundamentals/results improve, it will be difficult for BABA to rise again above the 100 level, which now becomes a psychological one.
Secondly, from a technical point of view, after the break of the 100 level to the downside, the price made a corrective wave. This is a complex correction that ended with a triangle as a reversal pattern. Looks like a double combination and it means that any recovery price may make should be strongly dependent on a break above that triangle’s apex.
In plain English, call options are favored only if the price is moving above 90.5 which doesn’t really seem that far.
As for the expiration date, depending on the moment that price is coming, I would go with the end of the week expiration date if the break above 90.5 comes until the first half of February (basically, if the break comes on a Tuesday, for example, will go end of the week in that week) or end of the month if the break comes in the 2nd half of the month.
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Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.
