Buying BABA call contracts.
Chinese stocks have become extremely cheap on a valuation basis. This is especially true for e-commerce leader Alibaba Group (BABA).
The stock is trading for just 9 times next year’s expected profits, and has pulled back to a key support area.
Meanwhile, Wall Street analysts are becoming more bullish on Chinese investments due to potential for lighter restrictions leading to business growth.
Geopolitical challenges are certainly a risk. But at current prices, it appears that investors have already priced in these risks. Any surprise should be to the upside triggering a potentially explosive rally.
Buying in-the-money call contracts gives us a chance to participate on the upside if Chinese stocks break higher. And the volatility and time value of these option contracts should help to preserve some value if the trade works against us.