Chinese e-commerce giant Alibaba is set to report earnings next week, and one trader is looking to cash in with a trade he believes has a high probability of succeeding.
Alibaba shares have surged 28 percent year to date, and Todd Gordon of TradingAnalysis.com says the stock appears to have consolidated after following an "uptrend" throughout most of the summer.
"It looks like we could continue to press higher following the report on Nov. 2," said Gordon Tuesday on CNBC's "Trading Nation."
But the impending earnings report also means that options on the stock have become more expensive, as a big move is likely on the announcement. To capitalize on the expensive prices of options, and in keeping with his bullish view, Gordon says that selling put options is the way to go.
"You don't want to buy calls, which is also a bullish bet, because those calls based on the implied volatility are overvalued, so it's better to be selling the expensive puts," he explained. A put represents the right to sell a stock at a given price within a given time frame, so selling a put is a is neutral-to-bullish strategy.
But rather than merely selling the put and being on the hook for any losses the stock may experience, Gordon chooses the more conservative strategy of selling a "put spread," which also entails buying a lower strike put in order to cap one's risk.
Specifically, Gordon sells the Nov. 4 weekly 100-strike put and buys the 98-strike puts for a total of 50 cents per share, or $50 per options spread. That $50 is the most he can make, and if Alibaba closes at or below $98 on Nov. 4, he will be down $150 on the trade. That would represent a 6.5 percent drop from Tuesday's opening price.
The risk-reward outlook may look negative, but "you're selling puts that are $5 below the market, so you have a very high probability of making money in this trade," he said.
According to Gordon, the options market is implying a 7 percent move in either direction for the stock once Alibaba reports earnings a week from Wednesday.
The stock is currently down about 3 percent in the past month.
TRADER TAKEAWAY: Todd Gordon is bullish on Alibaba going into earnings, and is selling the Nov. 4 weekly 100/98 put spread for a 50 cent credit per share.