JD.com (JD) – Trade Idea

Company Description

JD.com is China’s second-largest e-commerce company after Alibaba in terms of transaction volume, offering a wide selection of authentic products at competitive prices, with speedy and reliable delivery. The company has built its own nationwide fulfilment infrastructure and last-mile delivery network, staffed by its own employees, which supports both its online direct sales and its online marketplace businesses. JD.com launched its online marketplace business in 2010.

Select Share data

JD common shares closed at $30.29 (+0.50%)
52-week trading range is 19.21 – 40.21
YTD the stock has returned 44.7%, outperforming the broader market (SPX) by 27.6%
Beta versus SPX is 1.7
Volatility (1Y) stands at 43.6%
JD is estimated to report earnings on 08/15/2019

Chart

Open Interest

Trade Idea

What happened?

Shares of several Chinese companies have been trading higher on continued optimism for a potential trade deal to be reached between the USA and China, which would avoid an additional tariff on another $300 billion. JD is no exception. Shares are gaining momentum and may challenge JD’s 3M-highs.

Open interest (OI) in the underlying has also been building in recent trading sessions. Notably, the at-the-money (ATM) contracts have witnessed increased levels of activity with call-skewed action. Option flow leads us to believe that traders have expressed bullish bets and are long net-deltas as the ask has been paid frequently. 

To summarize sentiment: price action in the stock and option market transactions indicate a bullish bias among market participants.

Our thinking:

While the G-20 this weekend has been of significance to financial markets in the past, we believe that representatives of the USA and China are unlikely to make substantive progress on important issues relating to the ongoing trade war between nations.

With this in mind, it may make sense to take a contrarian view and fade recent bullish momentum in JD. The stock has been trading higher on hopes that additional tariffs may be averted. For those that are bearishly disposed, JD could offer an interesting opportunity to express a bearish bet. Find below an example on how you could trade this:

SideQtyExpStrikeType
Buy116 Aug30Put
Sell216 Aug26Put

Break-even on August expiration:

  • Profits of up to $2.78 between 28.78 and 26 with max gain of $2.78 at 26 or lower
  • Losses of up to $1.22 between 28.78 and 30 with max loss of $1.22 above 30

Rationale:

  • This trade idea risks 4% of the stock price with a break-even down ~5% and offers a max potential payout if the stock is down 14% in 49 days.
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