Since pole vaulting to a record high, Alibaba Group Holding Ltd (NYSE:BABA) shares have been in digestion mode. You’ll recall BABA stock soared some 13% last week after the company announced it was upping their revenue forecast to the moon. The ensuing euphoria lifted Alibaba to a new all-time high of $148.29.

Alibaba is down about 3% since Friday morning — on par with the broader losses in big tech names like Alphabet Inc (NASDAQ: GOOGL ) and Amazon.com, Inc. (NASDAQ: AMZN ). That includes a 1% dip today.

Equities like BABA stock that are perched at record highs are mighty fine trade candidates for market bulls. They carry a host of positive metrics that their peers lack.

Consider three of the most powerful ones:

First, stocks discovering new heights have zero shareholders that are underwater. That’s right. Every single person on the planet who carries shares of this record-high stock is sitting with a profitable position. Not a one is looking on with regret just hoping to be able to sell closer to their entry price to get out near break-even. This lack of overhead supply makes it easier for the stock to continue its ascent.

That’s right. Every single person on the planet who carries shares of this record-high stock is sitting with a profitable position. Not a one is looking on with regret just hoping to be able to sell closer to their entry price to get out near break-even. This lack of overhead supply makes it easier for the stock to continue its ascent. Second, any poor shmucks who are still short the stock see their pain hit new extremes. This increases their motivation to cover positions lest their losses become unbearable. The potential for a short squeeze further elevates the likelihood of higher prices.

This increases their motivation to cover positions lest their losses become unbearable. The potential for a short squeeze further elevates the likelihood of higher prices. Third, old shareholders that have long since parted with their shares now look on with regret. When something like BABA stock, which you sold at $100, soars to $140, you feel like the village idiot. The temptation to pile back in is real — particularly if a decent price dip materializes. Traders in this camp are all considered potential demand.

Throw it all together, and any retreat in Alibaba stock should be viewed as a buying opportunity.



Click to Enlarge Source: OptionsAnalytix

We are seeing mild profit taking on Tuesday as some shareholders are ringing the register. Once the weak hands are shaken out, look for Alibaba to continue higher.

The Trade on BABA Stock

Like many of its peers in the tech sector, Alibaba has seen a moderate ramp in implied volatility over the past week. As a result, its out-of-the-money put options are quite rich. Couple that with its overall bullish technicals and it looks like we have a great bull put spread candidate.

If you’re willing to bet the stock remains above $125 for the next month, then sell the July $125/$120 bull put spread for 55 cents or better. Consider it a wager on BABA stock not filling last week’s price gap.

The reward is limited to the initial credit and will be pocketed if the puts sit out-of-the-money at expiration. The max risk is $445, but you will lose far less if you plan on exiting if the stock falls to the short strike price of $125.

In timing the entry, consider waiting for an up day to materialize. Alibaba stock is trading at the lows of the day as I type and may need another down day or two before buyers return.

As of this writing, Tyler Craig held no positions in any of the aforementioned securities.