MKM Partners, an institutional brokerage firm, is expecting Alibaba (NYSE:BABA) shares, which are now trading at just under $103, to break above resistance at $105 and is telling clients to buy options in expectation that the stock will trade at $125 or more by January.
Jim Strugger, MKM’s derivatives strategist, says a break above $105 would open the door to $110 and to the December 2014 high and then probably to all-time highs around $120. Strugger advises clients to purchase Alibaba’s January $110 calls and sell January $125 calls to get in position. The bull spread cost was $3.60 when the stock was near $104.
“Third-quarter earnings and a building buzz ahead of BABA affiliate Ant Financial’s expected IPO – think of a Chinese version of PayPal Holdings (PYPL) — are potential catalysts over the medium term,” Strugger notes.
In addition, the January expiration captures Alibaba’s Singles Day sale on November 11. Sales during the shopping festival were $14.3 billion last year.
“Beguilingly Aggressive” Expectations
“Strugger’s trade is beguilingly aggressive,” states Barron’s. It expects a sharp shift in trading patterns when few investors “are so situated.” Strugger and his firm anticipate that the surge will continue even when the stock set a 52-week high of $105.50 early Monday. Currently, options are configured as if the stock will trade near $110 at either the October or November expiration. Most of the outstanding contracts see the stock around $100 by January, adds Barron’s.
Overall, the options patterns indicate that investors are not focused on the e-commerce giant completely yet. The investors would be buying the types of upside calls recommended by Strugger if they were focused. In brief, to make $15, investors could be risking around $3.60, the difference between the call strikes, but if the stock fails to cross $110, the trade is a failure.
In other Alibaba news, Missouri based startup EyeVerify was recently acquired by Ant Financial, Alibaba’s payments affiliate. EyeVerify uses biometric authentication technology to keep online transactions and consumer data safe. This is the first investment made by Ant Financial in the U.S. Global expansion has been on Alibaba’s agenda for quite some time. As AliPay expands beyond China into regions like Egypt, India and Europe for Chinese tourists, better safety features can result in faster adaption of this product.