How to Trade Alibaba (BABA) Stock Now

Chinese search giant Baidu (NYSE: BIDU) has been on the receiving end of a raw deal in the past week.

The company posted strong quarterly results after the close on Tuesday, but stateside developments have completely overshadowed the company’s continued growth. Fortunately for BIDU stock traders, this week’s pullback offers a bullish opportunity.

The crux of the problem for BIDU stock lies with sentiment surrounding the U.S./China trade war. The tariffs being levied in this trade conflict do not materially affect Baidu’s bottom line, but that hasn’t stopped bearish sentiment from invading every Chinese stock listed on a U.S. exchange.

Take Baidu’s most recent quarter, for example. Revenue soared 32% to $3.93 billion, arriving at the high end of Baidu’s forecasts. Baidu’s bottom line grew even faster, surging 57% year-over-year to $3.18-per-share on an adjusted basis.

What’s more, the company has its eye on markets outside of its cash cow search market. Baidu is also developing its own artificial intelligence chip for use in data centers, public clouds and autonomous vehicles.

But the big news to smack BIDU stock lower this week was a report that Alphabet’s (NASDAQ: GOOG, NASDAQ: GOOGL) Google is planning to launch censored search in China.

The combination of escalating U.S./China trade war rhetoric and Google’s return to the Chinese market were too much for BIDU stock to bear. As a result, the shares are down more than 11% this week. But, as I noted above, this is a boon for BIDU stock bulls.

BIDU’s price action has the shares trading near key technical support in the $225-$230 region. The shares are also heavily oversold and have plenty of room to run before they encounter potential technical resistance. As you saw from the most recent quarterly report, Baidu is a solid company with strong growth prospects. Investors are going to realize this in short order and snap up the stock at its current bargain pricing.

This is where we step in with options. Looking out to September to give ourselves a little time for a BIDU stock rebound to play out, we find that implied volatility is pricing in a 9.3% move. On the downside, that sets a floor of $200. On the upside, were looking at a potential rally to about $250, which is where we would expect technical resistance to emerge.

Two Trades for BABA Stock

Call Spread: With BIDU stock oversold and ready for a bounce higher, traders might want to consider a Sep $240/$250 bull call spread. At last check, this spread was offered at $2.50, or $250-per-pair of contracts.  Breakeven lies at $242.50, while a maximum profit of $7.50, or $750-per-pair-of-contracts — a potential return of 200% — is possible if BIDU stock closes at or above $250 when September options expire.

Put Sell: If you’re looking for a more conservative play on BIDU stock, then a September $200 put sell might be a way to capitalize on technical support. At last check, this put was bid at $1.93, or $193-per-contract.

As always, you keep the premium received as long as BIDU stock closes above $200 when September options expire. The downside is that should BIDU stock trade below $200 ahead of expiration, you could be assigned 100 shares for each sold put at a cost of $200-per-share.

As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.

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Source: Investor Place