How to Play Alibaba and Amazon (Without Buying a Share)

You'll boost your holiday cash flow, too...

There's no two ways about it: 40,000 jobs in retail have been lost this year. We might see a seasonal surge in numbers here shortly, but I don't think it will have staying power.

In fact, retail could still do worse - much worse - with more of these companies closing more of their stores. Macy's is closing 15% of their stores - one of the so-called mall "anchor" stores, along with other troubled names like Sears, Nordstrom, and JC Penney.

Morgan Stanley agrees with me, and it says the pain for Macy's and Nordstrom is NOT over.

That's a profit opportunity in and of itself, but I want to make the most possible money from the upcoming shopping season right now.

I've got shopping of my own to do, after all.

The way I see it, this is the best way to do that...

The Only Retail Stocks to Play Right Now

There are two companies to play here - you can play either or both; these guys are both in the same league.

They're Amazon.com Inc. (Nasdaq: AMZN), of course, and I'd put Chinese e-commerce giant Alibaba Group Holding Ltd. (Nasdaq: BABA) up there with them. These companies are dominating the retail sector and commanding the lion's share of American and Chinese online shopping dollars (and yuan).

Online shopping was responsible for 7.4% of all retail spending in 2016, and there's every reason to expect 2017 to be even bigger. Heck, by 2018, online is expected to take nearly 9% of all retail spending.

And even though other "traditional" retailers, like Wal-Mart Stores Inc.,  are beefing up their efforts to sell online, Amazon is still the online retail behemoth most responsible for their declining sales and traffic.

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Amazon is relentlessly innovative in its approach, and with the new Alexa and with its Dash buttons (which allow consumers to reorder their favorite products over and over), Morgan Stanley expects them to be able to capture 35% of all U.S. e-commerce sales in the fourth quarter.

Morgan Stanley's also estimating that Amazon accounts for half of all U.S. retail growth, up from just 17% in 2013.

Alibaba's story of its rise to dominance in China is very similar. Visionary leadership, a hardcore, innovative culture, and a willingness to do almost anything to kill the competition have put it in the same class as Amazon.

There's just one (big) problem.

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These Are Some of the Market's Most Expensive Shares

Yes, both these companies are ridiculously "cost-intensive" for regular investors.

You'd have to shell out more than $1,100 for one share of Amazon and nearly $200 for a piece of Alibaba's action.

Building a commanding position in these stocks is a very pricey proposition, especially with the holiday cash crunch just about upon us.

So, here's what I suggest: Leverage your way into participating in the future price moves of these stocks.

Even then, you could be looking at a pretty hefty cash outlay to do that.

Me? I won't make a trade that costs me more than 500 bucks.

How to Control AMZN and BABA for Pennies a Share

One way to do that that is the "call debit spread" strategy.

This is where you buy-to-open a call option at one strike price, and you sell another option to open on the same stock at a strike price above the one you bought, creating an initial cost, or "debit," to do so. And you do both on the same order ticket as one trade.

The goal is to have that sold strike be placed where you believe the stock, at expiration, will be at least a little higher than the current price, so the spread gets exercised and you make the difference in the strikes of the spread into your account, offset by the initial cost.

You can even price out the option-spread combinations to see if it's packing the potential return you're looking for - so long as AMZN or BABA just stay above the sold strike of a spread, and if it has the potential to yield you a rate of return you are happy with.

Let's look at a call debit spread with an expiration of January 2018.

That month is important, because it gets me through the "Santa Claus rally" and into the front month of New Year buying known as the "January Effect" - a wonderful time of year where people buy big and put their New Year's resolution money to work.

Here's how that works with BABA...

read out of trump phone call
Click to enlarge

BABA shares continue to trend higher after every little, slight pullback.

If you think that trend's going to continue, you can consider a Bull Call Spread or Call Debit Spread. Below is the trade example - not necessarily a recommendation.

read out of trump phone call
Click to enlarge

Here, so long as BABA is above the sold strike of $195 at expiration, the maximum profitability can be realized.

I encourage you to ask your broker how spreads resolve themselves in your account, according to their practices and policies.

There should be no actual buying and selling of stock - and no commissions on those transactions, because they're not sales of stock.

It should cash-settle at the point where the markets exercise their right to buy BABA at $195 (which is the same as you then selling it at $195), and then you "exercising" your right to buy BABA at $185 (to sell it at the $195 price).

That should bring in $10 per contract (or $1,000 on one contract), offset by the debit up front when opening the spread trade, which was $440.

This would result in a $560 per contract gain - a nice, juicy 127% rate of return.

read out of trump phone call
Click to enlarge

It works exactly the same way with Amazon, if you'd like to play that company, too. Obviously, your costs will be different, but the strategy is identical.

This is the best, safest way I know to bring in a little extra cash for the holidays and play the two biggest retail giants on Earth.

Fast-Moving Trades You Can Play Right on Your Cell Phone

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About the Author

Tom Gentile, options trading specialist for Money Map Press, is widely known as America's No. 1 Pattern Trader thanks to his nearly 30 years of experience spotting lucrative patterns in options trading. Tom has taught over 300,000 traders his option trading secrets in a variety of settings, including seminars and workshops. He's also a bestselling author of eight books and training courses.

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