Mike Khouw .’s Alibaba Trade

on CNBC’s “Options Action,” Mike Khouw talked about Alibaba Group Holding Ltd – ADR (NYSE: BABA) and the risks investors face with the stock. Khouw cited China’s security and regulatory oversight, potential antitrust sanctions and further restrictions as risks that could lead to a decline in profits at Alibaba.

The company will report earnings on Tuesday and the options market implies a 5.1% move in either direction by the end of the week. That’s slightly more than the 3.9% average move for the event. Khouw wants to take a long position in the stock because he thinks the fundamentals are good. It has 40% margin and double-digit earnings per share and revenue growth while trading at 22 times earnings.

To make a bullish bet, Khouw wants to buy the October $195 call for $13.20 and sell the August $205 call for $3.20. The trade would cost him $10. Since the spread’s width is also $10, he hopes the stock will move higher, but not above $205, so he can sell another call when the August call ends.

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