Alibaba (NYSE:BABA) spent a lot of time embroiled with Yahoo (NASDAQ:YHOO) over the past 18 months. The stock price went through wild swings as the story played out. But Yahoo's sale,Alibaba has been rising. In mid July it reached resistance that has been holding it back since last July.
The chart below shows that the stock pulled back from that level one last time to a higher low at the 20-day SMA before a push higher that is taking it through resistance into Thursday's earnings. BABA has seen a 6% move in a little over a week. Momentum is starting to look a bit overbought with the RSI breaking 70 while the MACD is crossing up.
If you think the short-term run could be a bit overdone -- as I do -- yet you also like the stock for a longer-term trade, then one structure to use for the report is a 1×2 Put Spread. I like the August monthly 87.5/85 1×2 Put Spread, which comes at no cost. It gives downside participation if the stock falls back to 85, where the maximum profit of $2.50 is attained. Below 85, you will be put the stock with a basis of 82.50.
Here's Why I Like It
First, 85 is about the level of the recent break out, so a retest over the next 7 sessions is not a far-fetched idea. Also, the open interest in the August option is the largest at that strike. I would be happy to own this stock at 82.5. If it moves up, I'll reassess a new entry.