Alibaba (BABA) stock rebounded Tuesday on progress over the remaking of Ant Group. However, implied volatility of the options remains elevated at 44%.
High volatility can provide higher option premiums than normal, which can be beneficial when focusing on option-selling strategies.
A bull put spread is a defined risk option strategy that profits if the stock closes above the short strike at expiry.
To execute a bull put spread, an investor would sell an out-of-the-money put and then buy a further out-of-the-money put.
Bullish BABA Stock Option Trade
Traders who think BABA stock will not drop below yesterday’s low around 230 could look to sell a February 19th 230 put and buy a February 19th 225 put.
Tuesday, this spread was trading for around $2.05. That means a trader selling this spread would receive $205 in option premium and would have a maximum risk of $295.
That represents a 69.49% return on risk between now and February 19th as long as Alibaba stock remains above 230.
If Alibaba stock closes below 225 on the expiration date and the trade is still open, the trade loses the full $295.
The break-even point for the bull put spread is 227.95 which is calculated as $300 less the $2.05 option premium per contract.
If Alibaba’s stock price drops below 225, I would close the trade early for a loss.
The stock is below the 21-day, 50-day and 200-day moving averages, but is coming out of oversold levels on its Relative Strength Index rating.
The quarterly earnings announcement for Alibaba stock is set for Feb. 4, so this trade would have earnings risk.
It’s important to remember that options are risky and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ
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