Rally in Chinese stocks is showing some exhaustion. How to trade it from here with options

China’s stimulus package and easing monetary policy have added trillions in market value to stocks like PDD Holdings, Baidu, Futu Holdings, and Alibaba. However, stocks don’t usually climb in a straight line, and many of these names are showing signs of exhaustion after a significant rally. Alibaba (BABA) , for example, has surged 40% in less than 30 days. I’m now looking for a bearish trade to capitalize on a potential pullback in BABA. This time, I’m introducing a new indicator for my trade setup: the MACD (Moving Average Convergence Divergence). Though the MACD is a lagging indicator and tends to deliver signals later, it’s highly favored among trend traders for providing reliable cues on longer-term trend changes. I cover many of these setups in my book Mean Reversion Trading . In the case of BABA, the blue line (the MACD line) is crossing below the yellow line (the signal line). This crossover is a sell signal, often indicating an upcoming trend reversal. The trade To capitalize on a pullback in BABA, I’m using a trade structure called a “bear put spread.” This involves buying a higher strike put and simultaneously selling a lower strike put, resulting in a net debit. The strikes should be positioned around the current price. For example, if BABA is trading at $102, I would buy a $103 put (higher strike) and sell a $101 put (lower strike) to complete the trade setup. Here is the exact trade setup: Buy $103 put Oct 25th expiry Sell $102 put Oct 25th expiry Cost: $50 (limit price .50c) If BABA is trading at $103 or below on expiration date, this trade will generate a 100% ROI on the amount risked. Adding 50 contracts, one could risk $2500 to make $2500 on this trade. -Nishant Pant Founder: Author: Mean Reversion Trading Youtube, Twitter: @TheMeanTrader DISCLOSURES: (Nishant currently has a FUTU 109-108 bear put spread and may consider similar trades on other stocks listed in this article.) All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, NBC UNIVERSAL, their parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium. THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.