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This chart says Alibaba's hit a floor: Trader
Alibaba (NYSE: BABA) shares are down 20 percent this year, but one trader thinks the stock has found a floor.
"If you look at a chart since its IPO, you can see Alibaba is starting to consolidate and I think we've seen a short-term bottom at $80 per share," said Keene on the Market founder Andrew Keene on Tuesday's " Trading Nation ."
Shares of the Chinese e-commerce company soared more than 75 percent in the two months after its September 2014 IPO, but they've since been in a downward spiral and they're now down 31 percent from their high. The selloff may be in part due to lockup expirations dumping millions of shares into the open market, with the largest one coming in September, when 1.6 billion will become available.
Read More Brace yourself for flood of Alibaba stock
But according to Keene, there are some striking similarities between the Alibaba charts and that of Facebook (NASDAQ: FB).
"Facebook was another highly hyped IPO," said Keene. "You can see that Facebook sold off initially and consolidated after four or five months. If you look at BABA from its IPO price to when it began to consolidate in February, it was the same time period." Facebook shares are now up more than 200 percent since breaking out of its consolidation range in July 2013, and that, to Keene, is a telling sign of what could be in store for Alibaba shares. "I think Alibaba has a date with $105 [per share] by the end of the year."
Read More The IPO business: an anemic Q1, a cloudy Q2
So to make a bullish bet on Alibaba, Keene turned to the options market. Specifically, Keene bought the Alibaba January 95/105 call spread for a total of $2.00 and financed the trade by selling the January 70/60 put spread for $2.00, reducing the cost of the trade to nothing. The strategy is profitable if Alibaba shares rise above $95 by January expiration. However, while the trade doesn't cost anything to put on, there is risk associated with the structure. By selling that put spread, Keene is risking $10 in potential losses. "I've given myself a lot of cushion to the downside here because there is a chance that BABA could take out $80," said Keene. "But I am protected from any losses between $70 and $95."
Plain and simple, "BABA is going higher," said Keene.
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