Date Published: 2017-05-16
Alibaba Group Holding Ltd (NYSE:BABA) stock has been on tear, up 56% in the last year, but a risk managed option strategy has so outperformed the stock it's almost unbelievable.
Selling an out of the money put spread is an investment that wins if the underlying stock "doesn't go down a lot." It sounds boring, but it has been a powerful tool with Alibaba Group Holding Ltd (NYSE:BABA) -- but only for the clever trader.
Here is how selling an out of the money put spread every month has done over the last three-years:
If that return looks low, it is. The stock has actually been up 35% in the last three-years. But this isn't the trade the professionals make, this is the trade the amateurs make.
What we need to do is measure the impact of earnings announcements on this strategy by adjusting our settings, like this:
Once we add this change, the results are staggering. Here are the three-year results for this option trade, now:
We have taken a 16.9% return and seen it rise to over 100%, and all we really did was take less risk. The 105% return in three-years has nearly tripled the stock and avoided all of the risk of earnings, while simply investing in the idea that Alibaba Group Holding Ltd "won't go down a lot."
CONSISTENT OVER TIME
We can do this exact test over the last two-years, as well:
We see a 9.2% return turned into a 47.8% return, or about a 5-fold increase by taking less risk. Again, this option investment has outperformed the stock, as well.
Finally, we can look at the last year:
Selling an out of the money put spread but avoiding earnings has returned 116% in the last year, versus a stock rise of 56%.
This is how people profit from the option market -- it's preparation, not luck.
To see how to do this for any stock we welcome you to watch this quick demonstration video:
Tap Here to See the Tools at Work
Thanks for reading.
You should read the Characteristics and Risks of Standardized Options.
Past performance is not an indication of future results.
Trading futures and options involves the risk of loss. Please consider carefully whether futures or options are appropriate to your financial situation. Only risk capital should be used when trading futures or options. Investors could lose more than their initial investment.
Past results are not necessarily indicative of future results. The risk of loss in trading can be substantial, carefully consider the inherent risks of such an investment in light of your financial condition.