Expectations are running sky-high ahead of Alibaba’s first quarter earnings and the Street is looking for earnings per share of $0.95. The range is wide, between 0.85-1.02; most analysts have a positive view on Alibaba while investing icons such as Stanley Druckenmiller are announcing long positions in the Chinese retailer.
What’s to do? If you are long the share, you could replace them with call options and thus reduce your capital exposure in the position while still participating in any upside. You could also write some out-of-the money calls and use the premium to buy protection (risk reversal).
Alternatively, you could trade a back ratio spread and express your bullish view.
A long ratio call spread combines one short call and two long calls of the same expiration with higher strike prices. This strategy is essentially a bear call spread and a long call.
The outlook of for a bullish move of the underlying price or implied volatility during the life of the options (hence having a positive delta and vega exposure).
The cost for entering the trade is relatively low, e.g. $2.95 per contract, and could be done for a credit. However, if the stock fails to move up sharply we could make very little or lose our premium.
An at-the-money straddle is currently priced in at $9.65 or a 6.2% move up or down. A potential upside move could take us to the 164 area from the current level around 155.
Management and risk description
At expiration, the maximum loss would occur should shares of Alibaba end up at the higher strike price of 157.50.
Source: Saxo Bank multi-leg ticket
* the trade does not include any commission or brokerage fees
Trade status: opening.
Trade: Buy +1 1/2 Back Ratio Spread BABA 100 (Weekly) 25 AUG 155/157.50 at $2.90 .
Maximum gain: unlimited.
Maximum loss: $555 (if shares close at expiration at $157.50), if below 155 it’s the debit paid of $2.90.
Breakeven (expiration) higher strike price + debit paid or 157.50 + 2.90 = $160.40.
Entry: today using the multi-leg ticket.
Stop: no stop.
Target: 162 or higher.
Time horizon: one week or less.
— Edited by Michael McKenna
Non-independent investment research disclaimer applies. Read more
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