Welcome back Active Traders.
Its been an incredible few weeks in the financial markets with new all-time highs in the Dow-30 and SP-500 on an almost daily basis. It was a great week for earnings as well and none tells the story as well as Alibaba, symbol BABA.
Recall that BABA recently went public in the largest ever tech IPO and covered in my prior post Swallowing BABAThe company reported earnings for the first time this past Wednesday 11/5 after the close. I approached the trade in my usual fashion, selling an Iron Condor outside the expected move. Specifically, I sold the 92/94 108/110 condor for a credit of 0.8.
To collect the entire 0.8, all the stock had to do was remain within the short strikes which are the red lines shown on the chart. The earnings day is shown as the orange candle on the left side of the chart.
Things went well at the outset and the stock moved mildly higher on the day after the report. But it continued relentlessly higher and was soon beyond my short strike at 108. I was not too concerned as sometimes the stock can challenge the short strike and even go beyond the long strike, just to give it all back and close within the expected move.
But BABA was different and started to push beyond my long strike at 110. I was tempted to close out the short 108 call and stay long the 110 call, but experience has shown this is a sure way to lose more than the max loss on the trade which is the difference between the credit received (0.8) and the spread (2.0) or 1.2. So I closed the 108/110 leg out for a debit of 1.55 which was a loss of 0.75 on the trade. But I turned around and went long the stock at about 110.40.
From there it was onward and upward and the stock really took off to the upside. I looked at this chart in the context of many other big winners in the Internet space such as GOOG, LNKD, PCLN and NFLX, It occurred to me that nearly all of the other stocks had broken charts – in other words they were well off their highs and in the state of repair. BABA on the other hand was fresh out of the gate, reaching new all-time highs and potentially much earlier in its life cycle and setting up to be the next great Internet stock.
So I did the only logical thing and bought more and went out long on Friday as the stock crossed 114.30. The shares continued to rally and closed at a new all-time high at even higher in the after hours session. I am expecting a gap up on Monday before the stock takes a rest in the $120 area.
Have a great week ahead.