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.

Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's “Closing Bell (M-F, 3PM-5PM ET).   In addition, he contributes to CNBCand CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

Follow Michael Santoli on Twitter @michaelsantoli

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