Alibaba has been trading in a range of $67 and $ 78 since November 2023 and it finally broke out from this range and surged near 8% since May this year. The recent surge of the price followed by the company’s announcement of the release of its new AI model which the company claims to beat OPENAI’s GPT-4 in language Skills.
Investors who have a long position and maintain a positive view of the stock. Investors can reduce some of the position while maintaining some exposure by implementing a covered call strategy partially on their existing holdings.
Covered call involves two parts strategy 1. purchased or own a stock 2.sell a call option of the stock with strike higher than the price the stock is purchased.
Advantages of covered call. 1. Treating the call option as a limit order. If the stock rises above the strike price, the option will be exercised, it will close the long position of the stock investor has already owned . 2. Receive the option premium. By selling the call option, investor can receive the option premium regardless of how the stock performs. If the stock does not rise above the strike price, the option will not affect the position the investor is holding.
If investor has a positive view on Alibaba but does not have any positions of the stock, investor can buy an out of the money call option
The Advantage of long calls 1.Limited Risk. Investors can’t lose more than the premium for the option 2. Leverage. With a small amount of money, investor can gain a much larger exposure in the stock. 3. Potential for asymmetrical gains. If he stock price goes up above the break-even point, you can make the same amount of money with limited risk. 4. Flexibility. You can benefit from a stock’s potential rise without having to buy the stock outright.
Risks of long calls 1. Long call options have a finite lifespan and will lose value over time, particularly if the stock price does not rise above your option strike. If the stock price does not rise above the option strike by expiry, the option will expire worthless. 2. Fluctuations in the stock price can increase the risk associated with long call options, leading to significant changes in the option's market to market value. 3. If the stock price doesn't go above the strike price before the option’s expiry, you might lose all the premium you paid for the option. 4. Long call options are also subject to the influence of macroeconomic factors that can impact stock prices, including interest rate movements, significant events, and major economic shifts.
Options are complex, high-risk products and require knowledge, investment experience and, in many applications, high risk acceptance. We recommend that before you invest in options, you inform yourself well about the operation and risks. In Saxo Capital Markets' Terms of Use, you will find more information on this in the Important Information - Options, Futures, Margin and Deficit Procedure. You can also consult the Essential Information Document of the option you want to invest in on Saxo Capital Markets' website. This article may or may not have been enriched with the support of advanced AI technology, including OpenAI's ChatGPT and/or other similar platforms. The initial setup, research and final proofing are done by the author.
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