One of the most interesting “smart money” trades we came across yesterday was with Alibaba Group (NYSE: BABA).
If you’re new here, a “smart money” trade is a relatively large volume option trade most likely made by a pro trader. The idea is to analyze unusual options activity, identify an interesting “smart money” trade, and then make our best guess as to:
- Which direction the trader thinks the stock is headed
- How much they think it will rise (or fall), and
- In what time frame this will all happen.
If we like what we see after putting all these pieces together, we can mimic the “smart money” trade (on a smaller scale), and potentially ride alongside our pro trader to profits. With all this in mind…
A Pro Trader Just Bet $2,295,000 that BABA Will Continue to Climb in the Next 12 Months
On Thursday, December 30, 2021, a pro trader seems to have bought 900 of the January 20, 2023, $120 call options on BABA for $25.50 per contract. Her outlay was $2,295,000.
BABA – Option Trade
The trade’s breakeven point is at $145.50, meaning that BABA needs to rise to $145.50 for the call option trade to break even. This is a nearly 18% upside from the stock’s previous close of $122.99. And then for every $1 the stock rises above $145.50, our “smart money” trader will make $90,000!
On analyzing the daily chart of BABA, the stock seems to have broken out of a falling wedge pattern (marked as blue color lines). This breakout level would now act as a support area. The stock is also trading above a long-term support level, which is marked as a pink color dotted line. All this makes it likely that our pro trader is bullish on BABA.
BABA – Daily Chart
This lends credence to our conclusion that the pro bought these call options, as opposed to selling them.
If you agree and would like to mimic this trade, here’s how:
Buy to open the January 20, 2023, $120 call options on BABA for $25.50 or better.
As always, depending on your risk appetite, do remember to set a stop-loss for the options trade to avoid significant losses.
Happy Trading!
— Trades of The Day Research Team
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