Stocks quoted in this article:
Alibaba Group Holding Ltd (NYSE:BABA) has traded for half a day, and we don't even have options listed. What is this, early 2014?
I'm told we have to wait until a week from today. Seriously? We might actually have an idea of volatility. Not a great idea, mind you, but at least something to go on. Where's the fun in that?
I semi-kidded that we should get options before they list the stock, but really, I don't think it's a terrible idea. You can't really hedge, so I wouldn't recommend playing all that large, but it's a way to take a stab at where the stock might open. It's also a way to pick where you think the IPO should trade. That's especially valuable on an oversubscribed name like this one.
I'm not going to hold my breath on it, but I honestly feel that listing options ahead of the IPO at least provides a price discovery function.
"Time" was when you had to wait three months to trade options on a new listing. That time is long ago. Now it's a week. You can get some sense of implied volatility in a week, but not an awful lot. There's no way to know how violently the name might react to any sort of company specific news.
Alibaba is a bit unique in that it comes to market as a gigantic company that earns real money. It probably doesn't earn enough to justify its current stock price of $93.89, but that's not at all my field. It's also not likely to influence the stock price at all in the near future; you'll generally go broke trying to short hot names on value.
Twitter Inc (NYSE:TWTR) and Facebook Inc (NASDAQ:FB) are generally the go-to names as far as recent high-profile IPOs go, and the behavior of the two is fairly similar. Facebook options started trading a little over two years ago at about a 55 implied volatility. It has gone as high as the mid-70s and as low as the mid-20s, where it now resides.
Twitter volatility also started at about 55 but spiked up to 100. It's now in the low 40s. Even though it feels like TWTR listed forever ago, it didn't; it was only last November. So in another year it will likely see low 30s/high 20s vol.
Alibaba might start life with lower vol than 55, thanks to both its size and the fact that vol in the market itself is very low now. It will very likely see a vol spike or three, but over time will drift lower just like pretty much every maturing stock ever.
So, if you're of a mind to take an options position early on, my only suggestion is not to pay up for longer-term options.
Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.