Trade Postmortem: Alibaba Group Holding Ltd (BABA)

Breaking down our winning options trade on Alibaba Group Holding Ltd (BABA)

Dec 22, 2016 at 10:48 AM
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Our recommended Alibaba Group Holding Ltd (NYSE:BABA) December 105 put just delivered a 90.6% winner for subscribers of our Leverage service. Below, we'll look back at what made the trade so attractive, and how BABA stock performed following our recommendation.

BABA shares flashed a bearish signal the day of our put recommendation. Specifically, on Nov. 2, immediately following the company's earnings report, the stock's intraday high and low engulfed the prior day's high and low. Plus, BABA closed near its lows. The result was a bearish "outside day." At the time, we had observed that a few other stocks had exhibited similar price action on earnings day, and experienced immediate follow-through weakness -- including Tesla Motors Inc (NASDAQ:TSLA), Caterpillar Inc. (NYSE:CAT), Abbot Laboratories (NYSE:ABT), Hawaiian Holdings, Inc. (NASDAQ:HA), Colgate-Palmolive Company (NYSE:CL), and Texas Instruments Incorporated (NASDAQ:TXN).

In addition, the e-tail stock was approaching a number of key technical levels. First there was the overhead 20-day moving average, which had served as support in July and September, but appeared to be switching roles to resistance, having largely capped BABA's upside in the latter half of October. Also, the shares were breaking down from the $102 area, or 50% above Alibaba's IPO price of $68, and were breaching support at the round $100 century level, home to heavy put open interest.

On top of these technical warnings signs, we observed high levels of overhead call open interest, which can translate into resistance. Plus, 15 of 16 analysts had "buy" or better ratings on BABA, with not one "sell" recommendation on the books -- leaving the door open for downgrades.

After our subscribers received the trade recommendation at midday on Nov. 2 and entered the position, BABA started heading south. In particular, the 20-day moving average asserted itself as resistance, consistently ushering the stock lower. While we failed to see any downgrades, per se, the shares did get hit with a price-target cut at Deutsche Bank in mid-November. Plus, Temasek Holdings cut its stake in the internet retailer by 26.8%. In other words, there were still signs of waning optimism on the stock translating into losses.

Beyond that was Alibaba's Single's Day slide on Nov. 11. Despite smashing its previous records with $17.8 billion worth of gross merchandise volume (GMV) (and year-over-year growth of more than 32%), expectations were so high leading into the event that a failure to hit a projected $20 billion GMV triggered aggressive selling.

Last Friday, our recommended December 105 put was closed at a profit of 90.6%. Below is a chart showing Alibaba Group Holding Ltd's (NYSE:BABA) performance over the past six months, including its rapid sell-off after our recommendation.

baba daily dec 22

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