Note: The author of this fundamental analysis is a financial writer and portfolio manager.)

China's Alibaba Group (BABA), one of the world's biggest and fastest-growing e-commerce stocks, has doubled in five years. But the stock has cooled lately, going sideways during the past eight months and sharply lagging the broader market on concerns about the impact of a global trade war. Now, Alibaba options traders are betting the stock will rebound soon and rise by more than 15% by mid-October. 

The optimism among traders is in stark contrast to technical charts that are flashing several bearish signs, suggesting the online retailer's stock could fall as much as 12%. Meanwhile, estimates for quarterly results indicate that the company may be hurt by high expenses.

Bullish Bets

Options traders are betting shares of Alibaba will rise by about 15% from its current price of $186.90, getting up to $215. The $210 calls set to expire on Oct. 19 have more than doubled to an open interest of about 20,000 open contracts. With the options trading at a price of $5 per contract, the stock would need to rise to about $215 for the options to break even if held until expiration

Bearish Indicators 

The technical chart has some disturbing trends that suggest the stock is at risk of declining in the coming weeks. Shares of Alibaba attempted and failed to break out at technical resistance at $201.50 and are now resting on a technical uptrend, with the potential to fall to the next level of technical support at $164. 

The relative strength index has been steadily falling since the beginning of June suggesting momentum is coming out of the stock. Meanwhile, volume levels have also been steadily declining as well. 

 

Rising Costs

Analysts are looking for revenue to soar by over 67% when the company reports fiscal first-quarter 2019 results in the middle of August. However, that big revenue growth is expected to result in earnings growth of about 13%, which suggests that expenses are eating away at the company's profits. The soft earnings growth has been a trend that has resulted in gross margins falling substantially in recent years. 

BABA Gross Profit Margin (Quarterly) Chart

BABA Gross Profit Margin (Quarterly) data by YCharts

It would seem at this point; options traders may be going out on a limb betting on the giant price spike

Michael Kramer is the founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdingsInformation presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.

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