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Maximizing Alibaba earnings: a smart income play for shareholders
Summary: Alibaba reports earnings today, and with implied volatility at 52%, options premiums are elevated. For investors already holding BABA shares, a covered strangle offers a way to generate 2.7% yield in +/- 30 days by selling high-priced options while managing risk through well-chosen strikes and expiries.
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.
Maximizing Alibaba earnings:
Maximizing Alibaba earnings:
a smart income play for shareholders
Alibaba (NYSE: BABA) reports earnings today after the bell, and the options market is pricing in a significant move. The stock recently traded around $126–$127, and with implied volatility at 52% (94th percentile), options premiums are rich.
For investors who already own BABA shares, this creates an opportunity to collect extra income by selling high-priced options. One such strategy is a covered strangle, which allows investors to monetize volatility while maintaining exposure to the stock.
Alibaba’s stock setup and volatility environment
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.
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| Case study: using covered calls to enhance portfolio performance This case study delves into the covered call strategy, where an investor holds a stock and sells call options to generate premium income. The approach offers a balanced method for generating income and managing risk, with protection against minor declines and capped potential gains. |
| Case study: using protective puts to manage risk This analysis examines the protective put strategy, where an investor owns a stock and buys put options to safeguard against significant declines. Despite the cost of the premium, this approach offers peace of mind and financial protection, making it ideal for risk-averse investors. |
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| Case study: using collars to balance risk and reward This study focuses on the collar strategy, where an investor owns a stock, buys protective puts, and sells call options to balance risk and reward. This cost-neutral approach, achieved by offsetting the cost of puts with the premiums from calls, provides a safety net and additional income, making it suitable for cautious investors. |
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 Bank's 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 Bank's website.