Mike Khouw’s Alibaba Trade

On CNBC’s “Options Action,” Mike Khouw spoke about Alibaba Group Holding Ltd – ADR (NYSE: BABA) and the risks investors are facing with the stock. Khouw named China’s security and regulatory scrutiny, potential anti-trust penalties and further restrictions as risks that could lead to an earnings decline in Alibaba.

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The company is going to report earnings on Tuesday and the options market is implying a move of 5.1% in either direction by the end of the week. That is slightly more than its average move of 3.9% for the event. Khouw wants to take a long position in the stock because he likes its fundamentals. It has a margin rate of 40% and a double-digit EPS and top-line growth while trading at 22 times earnings.

To make a bullish bet, Khouw wants to buy the October $195 call for $13.20 and sell the August $205 call for $3.20. The trade would cost him $10. Since the width of the spread is also $10, he is hoping the stock moves higher, but not above the $205 so he can sell another call when the August call expires.

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