Options Trading Series (LEAPS – BABA + JD)
BABA and JD are two of China's largest and fastest growing e-commerce companies. Due to trade war fears, Chinese stocks have been under heavy selling pressure lately. BABA is down ~20% from its ATH and JD is down ~40%.
On the other hand, both companies are producing outstanding financial results and investing in the future (i.e. Google + WMT announced partnerships with JD; and SBUX + KO announced partnerships with BABA).
In terms of growth, just as an example, BABA's revenue in the March quarter grew 61% YoY; cloud computing revenue grew 103%. JD’s revenue grew by 33% YoY; active customer accounts were up 28% YoY, etc. It's not easy to find companies of this size growing at such an impressive speed. Obviously BABA is a standout, but JD is actually differentiated in many ways – most importantly are the quality of products on the website and the buildout of the logistic network; I think JD wins there (JD, over BABA, is often compared to AMZN in the early days – I think JD is far ahead than where AMZN was at this stage of being a public company).
Technical perspective: both names are very oversold.
BABA – as you can see shares have traded sideways for about a year: ~$163-$165 has severed as a floor of support. The last time RSI touched 30 was in Dec-17. Shares ran up from $165 and hit $205 before selling off (24% move). I think the stock is set up nicely for another run-up.
JD - this stock has been a bit of a rollercoaster, hitting at a high of $50 with $35 serving as a floor of support -- which has just broken. The last time RSI hit ~25 was back in April 2018 when shares went from ~$35 to $45 before reversing course (28% move). While I do think there's more risk to this name, I think this stock is also nicely set up for a rebound.
Given the level of risk I see with these China names and not knowing how long the trade war fears will play out / uncertain to the extent of the impact at this point, I decided to do LEAPs in both names. What I will do is trade shorter dated options (both calls/puts) around these “core” positions.
Action: This morning I open both trades:
JD - 1/17/2020 $37 Calls (JD reports tomorrow morning).
BABA – 6/21/19 $180 Calls. (reports next week).
I think trade war fears are overblown and these company very well-positioned for the future. I'd be a buyer here and on any future weakness.
I will post update periodically.
Cheers!
On the other hand, both companies are producing outstanding financial results and investing in the future (i.e. Google + WMT announced partnerships with JD; and SBUX + KO announced partnerships with BABA).
In terms of growth, just as an example, BABA's revenue in the March quarter grew 61% YoY; cloud computing revenue grew 103%. JD’s revenue grew by 33% YoY; active customer accounts were up 28% YoY, etc. It's not easy to find companies of this size growing at such an impressive speed. Obviously BABA is a standout, but JD is actually differentiated in many ways – most importantly are the quality of products on the website and the buildout of the logistic network; I think JD wins there (JD, over BABA, is often compared to AMZN in the early days – I think JD is far ahead than where AMZN was at this stage of being a public company).
Technical perspective: both names are very oversold.
BABA – as you can see shares have traded sideways for about a year: ~$163-$165 has severed as a floor of support. The last time RSI touched 30 was in Dec-17. Shares ran up from $165 and hit $205 before selling off (24% move). I think the stock is set up nicely for another run-up.
JD - this stock has been a bit of a rollercoaster, hitting at a high of $50 with $35 serving as a floor of support -- which has just broken. The last time RSI hit ~25 was back in April 2018 when shares went from ~$35 to $45 before reversing course (28% move). While I do think there's more risk to this name, I think this stock is also nicely set up for a rebound.
Given the level of risk I see with these China names and not knowing how long the trade war fears will play out / uncertain to the extent of the impact at this point, I decided to do LEAPs in both names. What I will do is trade shorter dated options (both calls/puts) around these “core” positions.
Action: This morning I open both trades:
JD - 1/17/2020 $37 Calls (JD reports tomorrow morning).
BABA – 6/21/19 $180 Calls. (reports next week).
I think trade war fears are overblown and these company very well-positioned for the future. I'd be a buyer here and on any future weakness.
I will post update periodically.
Cheers!
Trade active
This morning BABA reported Q2 numbers which showed revenue growth of 61%, cloud computing revenue up 93% YoY, and annual active consumers increased by 24 million. The one-time stock compensation charge from the revaluation of Ant Financial impacted EPS, but, what's most important is that solid top line growth. BABA also confirmed that they raised 22B from SoftBank for its food delivery business. All around this was a stellar quarter.
What investors have to realize is that BABA is a seen as a proxy of China's economy, many US institutions are short the name to hedge their portfolios. This is actually a very good thing because with BABA just announcing that trade wars are not impacting them and they have ways to navigate this environment, it's only a matter of time before shorts close their position or face a squeeze.
Last week, JD reported a mixed report, revenue grew 31%, net service revenue grew 51%, annual active customer accounts increased 22% and marketing expenses increased 29% YoY. Guidance for Q3 came in a bit light which is the reason for the sell-off. However, just like BABA, JD is firing on all cylinders -- investing and positioning themselves for the future.
Good thing we have LEAPs in these name, which I've added to this morning (likely that these name will cut losses in half or even close higher). If you recall during BABA's last earnings report, the stock didn't move that morning and then, after investors digested information, the stock accelerated. These LEAPS are a core position. I'd suggest adding on these sell-offs.
One thing to remember is that we are in the last two weeks of August, large institutional money managers are rotating and will be looking for names to add to as we enter the final months of the year.....right now BABA/JD are high growth names trading at a discount, money is going to flow into this names.
Action: Add to positions.
I will post some links, articles, and trade updates periodically.
Feel free to leave a comment, ask a question, or share your thoughts.
Cheers!
Note
Just when you thought things couldn't get any worse for JD, the CEO, Richard Liu, was arrested over the weekend (yet quickly released) over charges of criminal sexual conduct. "The local police quickly determined there was no substance to the claim against Mr. Liu, and he was subsequently able to resume his business activities as originally planned," JD.com announced in a statement.
While this pattern is concerning (2nd time he's been accused), I think the business overall is insulated.
Good thing we expected short-term pain for Chinese stocks in general. Our JD options are dated all the way out to 2020. I am using all these sell-offs to add to my position.
I love buying when there's blood in the streets!
Note
These are gifts ladies and gents. The beauty of LEAPs is that we get to continue buying JD extremely cheap and have so much time until expiration. This is awesome. I am buying any 3-5% dips between now and 2020. Let's give BABA a few more days to consolidate. Will add soon.
Note
When I first published this idea here's what I wrote: "Given the level of risk I see with these China names and not knowing how long the trade war fears will play out / uncertain to the extent of the impact at this point, I decided to do LEAPs in both names. What I will do is trade shorter dated options (both calls/puts) around these “core” positions."
If you press play above, you see the story here.
Right now, especially in light of today's price action, I think the bottom is in (or very close to it, very impossible to be exact). The long-term risk-reward is in your favor.
Overall, both of these positions are only down 32-38% (not bad), and we have a long way to go. I'm very confident that these will generate nice returns.
As I mentioned, to play around the volatility, I'll be adding to my "core" positions AND looking at "weekly" calls. I'll post as I enter them.
Stay tuned.
Cheers!
Note
Just bought the JD Dec 21 2018 $29 Calls. Very oversold. Trade war talks turning positive this morning. Looking for a sharp bounce back soon.
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