BABA has surged in recent weeks, climbing from under $100 to its current range. The upcoming earnings event has fueled uncertainty, leading to increased demand for options.

• Current price: ~$127
• Implied volatility: 52% (historically high, IV rank 74%)
• Expected move: ±$7.97 (6.33%), based on elevated options pricing

Important note: The strategies and examples provided in this article are purely for educational purposes. They are intended to assist in shaping your thought process and should not be replicated or implemented without careful consideration. Every investor or trader must conduct their own due diligence and take into account their unique financial situation, risk tolerance, and investment objectives before making any decisions. Remember, investing in the stock market carries risk, and it’s crucial to make informed decisions.

The covered strangle: turning volatility into income

A covered strangle involves selling an out-of-the-money (OTM) call and an OTM put while holding shares. It generates immediate premium income but comes with potential obligations: selling shares if the stock rises or buying additional shares if it falls.

Trade structure:

• Sell the $150 call (March 21 expiry) → Collect $1.90 per share
• Sell the $110 put (March 21 expiry) → Collect $1.45 per share
• Total premium received: $3.35 per share

With BABA at $126, this equates to a 2.7% return in ~30 days.

Strike selection and expiry considerations

For this trade, we selected strikes well outside the expected move (+/- $8) and with an expiry approximately one month away. With the rich premium, you have the flexibility to choose strikes closer or further from the current price. You can also opt for a shorter expiry, such as this Friday. Shorter expiries leave less time for the stock to move in or out of your chosen range, which increases risk. Similarly, collecting more premium by moving strikes closer to the stock price means taking on greater assignment risk.

Profit potential and key risks

This strategy benefits from a stable or moderate stock move, while risks arise if BABA moves sharply in either direction.

Best case: At expiration, stock stays between $110 and $150

• Both options expire worthless. You keep the full $3.35 per share premium as profit.

Moderate upside: At expiration, stock rallies above $150

• The call option is exercised, and you sell your shares at $150, locking in gains (plus keeping the $3.35 premium).

Downside risk: At expiration, stock drops below $110

• The put is exercised, and you must buy more shares at $110. Your effective cost basis is $106.65 ($110 strike minus the $3.35 premium). This is a discount from today’s price but increases your position size.

Alternative approaches

For investors wanting a different exposure, here are two alternatives:

• Bullish alternative: call spread – Buy a $130 call, sell a $140 call (March expiry). Lower risk, but still benefits from a post-earnings rally.
• Bearish alternative: protective put – Buy a $120 put to limit downside risk while keeping full upside potential.

Final thoughts

With Alibaba’s earnings today, high implied volatility creates an attractive setup for income generation. The covered strangle offers a strong 2.7% yield in one month, with clear risk management. For investors already holding BABA, this can be an effective way to extract additional return while remaining in the trade.