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!
