Mike Khouw's Alibaba Trade Ahead Of Earnings

On CNBC's "Options Action," Mike Khouw suggested that investors with a long position in Alibaba Group Holding Ltd - ADR BABA should consider a less risky alternative going into earnings.

Khouw wants to sell the September $235 put for a credit of $8 and buy the September $260/$285 call spread for total cost of $7. With the options structure, he collects a premium of $1. If the stock rallies through $285, Khouw is going to make a profit of $26 or a little over 10% of the current price. If the stock drops below $235, he would have to buy it at $235, but his entry price would be $234 or around 7% below the current price. If the stock doesn't move at all, the $235 strike put and $285 strike call would decay more than $260 call, so it could be possible to collect more than $1, explained Khouw.

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Tony Zhang likes the stock a lot, but he is concerned about the geopolitical risk, so he would not sell the September $235. He would just buy the September $260/285 call spread for $7.

Carter Worth sees a Friday's decline in Alibaba as a weakness to take advantage of. He thinks that Alibaba is a strong stock and he wants to buy it.