How long-term investors can earn income or buy Alibaba at a discount with options

June 2025 brings Alibaba (BABA) into focus for cautious investors: the company has declared a new dividend, posted strong earnings, and is seeing its share price swing on regulatory headlines. With option premiums higher than usual, two conservative strategies—covered calls and cash-secured puts—can help investors generate extra income or buy BABA shares at a lower price.

What you need to know first: Key terms explained

• Option: A contract giving the buyer the right, but not the obligation, to buy or sell a stock at a set price by a certain date.
• Covered call: You sell a call option on shares you already own, agreeing to sell those shares at a set price if the option is exercised.
• Cash-secured put: You sell a put option, agreeing to buy shares at a set price if assigned, and set aside enough cash to buy the shares if required.
• Premium: The income you receive for selling the option.
• Strike price: The agreed price at which the shares may be bought (put) or sold (call).
• Expiry date: The last day the option can be exercised.

Why BABA is timely in June 2025

• Dividend: You must hold BABA through 12 June to receive the new annual and special dividend (about $1.05 per share).
• Recent strong earnings: The company reported rising profits and growing cloud/AI revenue, supporting long-term value.
• Regulatory news and volatility: Ongoing headlines create larger swings in the share price, which increases option premiums and makes income strategies more attractive.

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 following sections explain each strategy on its own. You can choose either approach independently, based on your goals and portfolio—there’s no need to use both together.

1. Covered call: Earn extra income from shares you own

Who is this for?
You already own at least 100 shares of BABA and would consider selling them at a higher price, in return for extra income now.

How it works:

1. Sell 1 covered call contract (strike $128, expiry 20 June 2025)
   • Current share price: $120.20
   • Premium received: ~$1.29 per share ($129 for 100 shares)
   • Dividend: ~$1.05 per share (if held through 12 June)
2. What are the outcomes at expiry?
   • BABA stays below $128:
     You keep your shares, the $129 option premium, and any dividend received.
   • BABA rises above $128:
     Your shares are sold at $128 each. You keep the $129 premium, the dividend, and the profit from $120.20 (today’s price) to $128.
3. Risk and reward:
   • Your maximum upside is capped at $128 + premium + dividend.
   • If the price rises well above $128, you will not benefit beyond that price.
   • If the price falls, the premium and dividend provide a cushion, but you still own the shares.