Editor’s Note: I spent last Sunday at the beach enjoying a beautiful early fall day. That’s one of the benefits of living in North Carolina. Despite the blazing sun and warm ocean water, it won’t be long until we start feeling the chill of winter’s approach.

It also won’t be long until the holiday gift buying season hits full stride. Already, merchants around here have cardboard reindeer propped up next to Halloween candy. Consumers can be forgiven for feeling a bit conflicted as they wander the store aisles wondering which holiday to focus on now. And I’m just as conflicted about what to do with a huge gain in a retailer that has taken off recently.

Viable Threat

So far, the American consumer has come through in spades this year. And now that unemployment is once again falling while wages are rising faster than inflation, consumer spending should not slow down.

That’s good news for all retailers but has been especially beneficial for Chinese e-tail giant Alibaba Group Holding Ltd. (NYSE: BABA). Five years ago, when Alibaba was regarded by Wall Street as a viable threat to Amazon.com’s (NSDQ: AMZN) dominance in that space, its share price crested above $300.

However, the arrival of COVID-19 and the supply chain disruptions it caused proved disastrous for Alibaba. At the same time Chinese consumers had less money to spend, the company also had difficulty fulfilling overseas orders.

By October 2022 BABA had fallen below $60. Fourteen months later it only managed to scrape above $70, which is when my PF Pro stock screener told me that BABA was undervalued and likely to rally in 2024.

Take It or Leave It?

I issued a buy alert that day for the stock along with a call option trade. A call option increases in value when the price of the underlying security goes up.

For my options trade, I chose the $70 strike price that expires in January 2026. That day, that option could be purchased for $22.

At the start of this week, BABA was trading around $116 (circled area in chart below). That is 61 percent above where it was in December 2023 when I recommended buying it.

At the same time, my call option was trading for $52. That works out to a return on investment of 136 percent in just ten months!

I am gratified by that result. Hopefully, my PF Pro subscribers fully participated in that gain, too.

But now, we have a tough question to answer. Do we sell our option and book the gain, or wait until next year to see how BABA performs in 2025?

Love is in the Air

Alibaba isn’t the only Chinese company finding love on Wall Street these days. A recent announcement by China’s central bank that it would engage in quantitative easing to spur consumer spending lit a fire under the entire Chinese stock market.

At the start of this year, the SPDR S&P China ETF (NYSE: GXC) was trading around $66. It was still trading at that price three weeks ago. But since then, it has shot above $95 as foreign investment came pouring back into China.

Alibaba is the second-largest holding of that fund at approximately 8 percent of fund assets (in case you’re wondering, Tencent Holdings is the largest position at 12 percent of fund assets).

As long as Wall Street’s love affair with China continues, Alibaba should keep riding up the charts. But sooner or later that ardor will fade, and BABA could fall quickly if consumers don’t spend as expected this fall.

Smart Consumer

I’d rather not sell my call option now. I have held it for less than a year, meaning my profit would be subject to short-term capital gains treatment.

Also, my option still has fifteen more months to go until it expires. Who knows, perhaps BABA can make it all the way back to $300 by then. If it does, then my option would be worth fourteen times what I paid for it!

That’s why I will use a stop-sell order to protect most of my profit in Alibaba. And since I want to book a gain of at least 100 percent for this trade, I’ll set my stop-sell price for my call option at $44.

That way, I get sold out of this position if BABA turns around and starts dropping. But if it keeps going up, I can raise my sell limit price accordingly.

That’s what I call being a smart consumer.

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