Mike Khouw's Alibaba Trade

On CNBC's "Options Action," Mike Khouw spoke about Alibaba Group Holding Ltd - ADR BABA and the risks investors are facing with the stock. Khouw named China's security and regulatory scrutiny, potential anti-trust penalties and further restrictions as risks that could lead to an earnings decline in Alibaba.

The company is going to report earnings on Tuesday and the options market is implying a move of 5.1% in either direction by the end of the week. That is slightly more than its average move of 3.9% for the event. Khouw wants to take a long position in the stock because he likes its fundamentals. It has a margin rate of 40% and a double-digit EPS and top-line growth while trading at 22 times earnings.

To make a bullish bet, Khouw wants to buy the October $195 call for $13.20 and sell the August $205 call for $3.20. The trade would cost him $10. Since the width of the spread is also $10, he is hoping the stock moves higher, but not above the $205 so he can sell another call when the August call expires.

See also: How To Buy Alibaba Stock