The hoopla leading up to the Alibaba IPO is over. The stock opened significantly higher than expected due to the NYSE process of setting the first trading price. Thus there was no money for traders to make between the expected $68 opening price and the peak at $99. There was money to be made trading the fall of Alibaba from its immediate $99 peak down to $90 over the next half hour. Alibaba struggled back up to near its $94.50 opening price by the end of the first trading day. This span of time also provided traders with an opportunity to use their technical analysis skills and make a few bucks. Now our focus is on the future of the stock price of a company. This is a company in which the vast majority of shareholders have no say in the running of the company. We think this is a great deal for the insiders who have made a lot of money and a bad deal for anyone who invested their money in BABA with an eye to future earnings and retirement. Our belief is that investors will wake up to the fact that Alibaba is a bad deal for non-insiders. Then the issue will be making money by trading the fall of Alibaba.
Timing a Trade
The first trading day after the IPO the stock is trending down. Our belief is that those who bought the stock are slowly but surely selling out of their positions. If a panic ensues the stock could fall like a rock. But the more likely scenario is that the stock will not perform as well over the long term as many have hoped. That means that the stock will drop when its financials are published and are disappointing. Close attention to evolving market sentiment will be necessary to make money in trading the fall of Alibaba now or in the future.
Trading Options on Alibaba
A week after the Alibaba IPO trading stock options will be possible on this stock. If you believe as this writer does, that Alibaba is set to take a hit, trading the fall of Alibaba will take the form of buying puts on the stock. If you take this route in trading the fall of Alibaba you will limit your risk to the price of the options premium. And you will be able to leverage your capital as well as you will not be buying and selling the stock. Rather you will simply exit your options contract at the most profitable moment in order to maximize your gains in trading the fall of Alibaba.
And What If Jack Ma Is Right?
The founder of Alibaba says that he wants to preserve the culture of the company and as such he does not want outsiders to direct the company’s future. This is all fine and dandy but he wants your money! Nevertheless, it is certainly possible, although not probable, that the company will prosper and the segment of the company in which many now own stock will go up in price and create fortunes. There is an options strategy called a long straddle in which the options trader buys both calls and puts on a stock. His worst loss is the premiums he pays for the contracts if the stock price does not change. If the stock goes up or down he profits from either the call or the put. If you are uncertain of the days ahead for BABA this could be reasonable choice. But, always remember that if you do not understand the trade, stay out. And always do your own homework.
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