Trader could make four times his money off of this online retail giant’s drop

The meteoric rally by Chinese e-commerce giant Alibaba is about to come to an end, according to Andrew Keene of AlphaShark. And he has devised a way to cash in.

Alibaba's shares are up around 31 percent year to date, and Keene sees what he terms a "clear bull channel" on a short-term daily chart of BABA. But turning to a longer-term weekly chart, he views clouds on the horizon.

Keene sees a "double top" forming, as the stock topped out at the $120 level in November 2014 and now appears to be having a bit of trouble at $110. This pattern is often thought to show a layer of resistance, meaning the trader thinks the stock is topping out.

Just how low could Alibaba go? Keene believes $92.50 isn't out of the question by November for the online retail company thanks to earnings. That would represent a 13 percent drop.

Thursday on CNBC's "Trading Nation," Keene explained that this level "is the 50-day moving average and also where the options market makers are implying the stock can move."

To capitalize off of this expected move, Keene bought the November 97.5-strike puts and sold the November 92.5-strike puts for $1.20 per share, or $120 per options contract. Should BABA close below $92.50 on November expiration, the "put spread" could be worth $500 — more than four times what he's risking on the trade.

"When I'm trading countertrend, [I look to have] a great reward-to-risk set up," said Keene.

Alibaba opened at $106.50 on Friday, just slightly below its $109.87 high for the year, which it made Thursday.


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Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Sara Eisen

Sara Eisen joined CNBC in December 2013 as a correspondent, focusing on the global consumer. She is co-anchor of the 10AM ET hour of CNBC's "Squawk on the Street" (M-F, 9AM-11AM ET), broadcast from Post 9 at the New York Stock Exchange.

In March 2018, Eisen was named co-anchor of CNBC's "Power Lunch" (M-F, 1PM-3PM ET), which broadcasts from CNBC Global Headquarters in Englewood Cliffs, N.J.

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