BABA shares were displaying strong price action ahead of our bullish trade recommendation
Subscribers to Schaeffer's
Option Advisor recently doubled their money with
Alibaba Group Holding Ltd (NYSE:BABA) July 105 calls, which we recommended in the April issue of our options recommendation newsletter. Let's break down why we were bullish on BABA stock to begin with, and how the options trade played out.
After gapping higher thanks to a strong earnings report in January, Alibaba stock had been consolidating a few points above the round $100 level for almost two months. The shares broke north from this area of consolidation to cross above their 20% year-to-date breakeven level, exemplifying the stock's impressive technical strength.
Despite this showing on the charts, BABA stock was heavily shorted. More than 111 million shares were sold short, which equated to more than two weeks' worth of buying power, based on the stock's average daily volume. Pessimism was also apparent among retail investors, with a TD Ameritrade study revealing this crowd to be net sellers in February and March.
Putting the icing on the cake was BABA's 30-day at-the-money implied volatility, which ranked below 99% of comparable readings at the time of our March 24 options recommendation -- meaning premiums were relatively inexpensive.
As expected,
Alibaba stock continued its ascent on the charts following our recommendation. BABA cruised to record highs by May 15, when we closed our position for a 100% profit.
