An options trade on this potential winner from U.S.-China trade talks that minimizes risk

Ahead of US-China trade talks, Nishant Pant of Trading Extremes has initiated a bullish call spread on BABA (Buy $121 call, Sell $122 call, July 11 expiry), risking $50 per contract with a potential profit of $50 if BABA closes at or above $122 by expiration; the trade is predicated on bullish signals from MACD, DMI, and RSI indicators, with a potential exit strategy tied to a reversal in the MACD signal should trade talks falter.

Analysis

The prevailing market focus is on the resumed US-China trade talks in London, an event carrying binary risk capable of causing significant market fluctuations based on a single headline. In this context, a specific short-term bullish trade on Alibaba (BABA) has been outlined, structured as a $121-$122 bull call spread with a July 11 expiry. This strategy, initiated with BABA trading at $121.48, seeks to profit from a potential positive outcome from the negotiations, offering a defined risk of $50 per contract for a potential $50 profit if BABA closes at or above $122 by expiration. The trade's rationale is supported by several technical indicators: a bullish crossover on a short-term MACD (5,13,5) on June 3, a Directional Movement Index (DMI) showing DI+ rising as DI- declines, and a Relative Strength Index (RSI) consistently rising since May 30, all collectively indicating strengthening bullish momentum for BABA. Recognizing the high uncertainty surrounding the trade talks, an aggressive exit strategy is emphasized, involving either an immediate closure of the position if talks falter or a technical exit based on a bearish MACD crossover. While overall market sentiment is mixed and cautious due to trade uncertainties, the technical setup for BABA itself is interpreted as bullish.

Key Decisions for Investors

• Investors should closely monitor developments from the US-China trade talks, as an unfavorable outcome could trigger a sharp sell-off in China-exposed equities like BABA, negating the current bullish technical setup.
• For those considering similar short-term tactical trades on BABA, employing defined-risk strategies such as the proposed bull call spread is advisable given the binary event risk and potential for heightened volatility.
• Traders should pay close attention to the MACD indicator for BABA; a bearish crossover below its signal line would serve as a key technical signal to exit long positions, as per the outlined risk management strategy.