Alibaba Group Holding (BABA) ADRs (American Depository Receipts) rose 6.6% as of midday Monday, May 12, after the positive Chinese tariff news was released. Selling short put options provides 3.3% yields for one-month strike prices that are 5% out-of-the-money.

BABA is at $133.48 for this $323 billion market cap Chinese trading company, up from $125.33 on Friday. The stock reached a recent low of $99.37 on April 8, but is still off its 6-month high of $147.57 on March 17, before the trade wars between the two countries erupted.

Some value investors like this stock as it has low multiples. The company is expected to release earnings for its quarter and fiscal year ending March 2025 on May 15 before the market opens. Analysts are expecting $1.77 adjusted (non-GAAP) earnings per share (EPS) for its Q4, well below $2.95 last quarter, and $9.04 for the full year.

Moreover, for the coming year, analysts project adj. non-GAAP EPS of $10.24. That puts the stock on a forward price/earnings (P/E) multiple of just 13x ($133.48/$10.24 = 13.03). 

That is below its historical forward P/E average multiple. Seeking Alpha reports its average over the past 5 years has been over 15x, although Morningstar says the average has been 12.04x.

Given the stock's volatility, it makes sense for potential buyers to seek a lower buy-in price. One way to do this, and get paid well for the wait, is to “Sell to Open” out-of-the-money (OTM) puts in one-month expiry periods.

Short Put Trades Look Attractive

For example, look at the $127.00 strike price for the June 13, 2025, expiration put option contract. That is 32 days from now, and the strike price is 4.4% below today's price.

The midpoint premium is $4.55 per put contract. That means that a cash-secured short-seller of these puts (i.e., “Sell to Open” trade) can make an immediate yield of over 3.58% (i.e., $4.55/$127.00 = 0.035826).

An investor who secures $12,700 with their brokerage firm can enter an order to Sell to Open 1 put contract and make an immediate credit of $455.00.

As long as BABA stays over $127.00 on or before June 13, the investor's collateral of $12,700 will not be assigned to buy 100 shares. However, even if that happens, the breakeven is:

  $127.00 - $4.55 = $122.45

That is 8.3% below today's price, providing the investor a good buy-in price.

More risk-averse investors could short the $126.00 strike price put for a 3.29% yield. 

Alternatively, the investor could short the 127.00 put and buy a put at the $125.00 strike, for net credit of $0.70 ($4.55-$3.85). That provides downside protection from $125.00 and below, leaving a net risk of just $1.30 (i.e., $2.00 spread less the $0.70 net credit). The maximum profit here is a yield of 55 basis points (i.e., $0.70/$127.00) for one month.

To enhance this profit, the investor could also short an out-of-the-money call option, such as the June 13 $145.00 call option for $3.53. This is known as a Jade Lizard play. 

The total profit potential would be $4.23 (i.e., $0.70 + $3.53), close to the cash-secured short-put play, but with more downside risk protection.

The bottom line is that there are some good short-put plays for investors in BABA stock, given the improved outlook for the company and its low valuation.