We here at Money Morning think that Alibaba Group Holding Ltd. (NYSE: BABA) is a must-have stock for the long term. Understandably, its high share price can be intimidating. Tuesday, it traded near $182 per share.
But what if there were a way to profit from Alibaba stock without having to buy the stock itself? And what if the trade was low risk?
Well, Money Morning's options trading specialist, Tom Gentile, has a great way to profit from Alibaba stock in the short term. And his strategy is even easier than you think.
Before getting into the nitty gritty of the strategy, let's talk about why we're so bullish on Alibaba stock for the long term.
Alibaba Stock Is One of the Best Long-Term Buys on the Market
If you're looking for a long-term investment, buying shares of Alibaba stock is still an excellent option. In fact, readers who followed Money Morning Executive Editor Bill Patalon's recommendation in 2014 have already seen gains of 94%.
Alibaba is China's largest retailer, and according to Forbes, is the sixth-largest retailer in the world. Clearly, the company is so much more than just "the Amazon of China." While Amazon.com Inc. (Nasdaq: AMZN) is one of the greatest success stories of our time, such a comparison does not do Alibaba justice.
For starters, Alibaba dominates China's e-commerce industry, and that's a big deal, since China is the world's largest e-commerce market. Sales there could reach $2.4 trillion by 2020, according to eMarketer. But again, there is much more to the story than the e-commerce space - providing a third-party platform for other retailers, offering cloud computing services, data management, and the Alipay online and mobile payment solution.
Editor's Note: Tom has used this pattern to show readers triple-digit gains in one or two days. Click here to learn more...
Alibaba is perfectly positioned to take advantage of China's new trillion-dollar "One Belt, One Road" Initiative. This is a massive, transcontinental infrastructure initiative, started in 2013, meant to expand trade across 68 countries throughout Asia, Eastern Europe, and Africa. The plan includes over $1 trillion in infrastructure investment across the region.
One Belt, One Road is going to boost Alibaba stock even further by helping build up neighboring economies and connecting them to China. The company will be able to expand its customer base on a global scale, all while the Chinese government foots the bill. That's not to mention what a growing Chinese economy will do for Alibaba's profits.
The Best Way to Profit from Alibaba Stock in the Short Term
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Building a reasonable position in Alibaba stock would take a lot of cash right now, so Gentile has a way to use leverage to participate in its future gains.
Labeled the "call debit spread" or a "bull call spread," it's a strategy where you trade two call options with different strike prices but the same expiration date.
Because you buy the lower strike and sell the higher strike, there will be an initial cost. However, it will be lower than just buying a call outright, because the higher strike call will help pay for the lower strike call's upfront cost.
This lowers your risk because you have less money in the trade. However, the trade-off is that the upside potential is capped.
Gentile recommends working with a January 2018 expiration date. Between now and then, you can benefit from the traditional end-of-year "Santa Claus rally" and the surge that often happens in the new year, known as the "January Effect."
Next, you choose your strike prices. The goal is to have the higher strike just a little below where you think Alibaba stock will be at the end of the third week of January - the options' expiration date. Considering how the stock traded all year, rallying and pulling back at fairly regular intervals, you could buy the 185 call and sell the 195 call.
If you think Alibaba stock will be even higher, you can move your strike prices up to the next level.
Remember, you are not actually buying and selling shares of stock. With this example, at expiration, if you are right, you make $10 gain per options contract (or $1,000 per lot), offset by the initial cost. In this case, that would be about $365, for a net gain to you of about $635 (173%).
Not a bad way to pay for your holiday shopping bills!
If You Like Fast Cash, You Don't Want to Miss This
Tom Gentile loves fast money. That's why he's been working on a new invention. It's a way to get rapid-fire profits in your hands week after week.
He's talking about trades you can make from anywhere, even right on your phone, in four days or less.
The pattern behind these quick paydays appears every single week. And he's the only one who knows how to find it.
He's used it to show his readers top gains like 100% on RTN in one day, 100% on BIDU in one day, 120.93% on MS in two days, and 124% on ABBV in one day.
If you hope to find yourself with a pile of extra cash in your pockets, click here to learn more...
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