On 24 Dec 2020, I shared a trade idea on BABA on our telegram community channel (if you are not a member yet, join our community for FREE).
Soon after the post, I received a note from one of our readers to help him/her understand why I took that trade (btw, thank you my reader for your kind words):
I decided to answer this via detailed post as many other readers might have similar question.
Here are the trade details:
- Underlying stock: BABA
- Type of Option: Call Option
- DTE: 19 Feb 2021
- Strike: 225 Call
- Premium paid: $14.90 debit
Here is the my real money trade screenshot:
A Bullish Contrarian Trade on BABA
So, the key question was why a bullish trade on BABA and why this specific trade set-up?
Based on my chart analysis, I found that BABA tends to follow 150wks simple moving average for a longer term support which at that time was at $197+/-.
However, at that time 197+/- was too far fetched which doesn't seem likely to get hit, and the two support levels before that were $225+/- and $211+/- ; and that's why I chose to open $225 (At-the-money) Bullish Call option at that time.
I chose Feb'21 DTE for expiration because that will fall during the next earning cycle and I expect by that time, these troubles should be over for BABA and a new year will be in the making. IV tends to rise going into the earnings.
I also thought that selling was overdone (it was the largest 1 day decline in many years) in an already declining trend. Remember, BABA made all time high of $319 in late October and since then, it's been on a declining trend.
I chose to open a Call Option, simply because I wanted to limit my exposure while profiting hugely should there be any positive news about BABA.
Bottom-line, It is hard to chose a trade with specific points when the underlying is being sold in a panic mode. So one has to structure one good trade with limited risk. At the same time, minimize loss of capital via proper capital allocation. In fact, for our OP Inner Circle Mastermind, we even purchased BABA shares on the day of sell off with a long term bullish view.
Should you have any follow-up questions or comments, please feel free to write below.
(We also have a masterclass tomorrow, if you want to learn more about options. Register your spot for FREE)