Alibaba Group Holding Ltd (BABA) Call Players Pile On Before Earnings

Alibaba Group Holding Ltd (BABA) option players are pricing in a bigger-than-usual post-earnings swing, with the stock's call options hot

Jan 23, 2017 at 12:57 PM
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Chinese e-tail giant Alibaba Group Holding Ltd (NYSE:BABA) is set to report earnings tomorrow morning, and option players are betting on a bigger-than-usual post-earnings swing for BABA shares. While over the past eight quarters, BABA has averaged a one-day post-earnings move of 5.1%, this time around, option players are pricing in a larger-than-usual single-session swing of 6.8%, with call buying accelerated heading into the event.

BABA is currently trading 1.4% higher at $97.31. Since hitting an annual low in early February, BABA shares have managed to tack on 64%. However, BABA may be running into resistance at its 100-day moving average, which acted as a floor on several occasions between March and June, before switching roles in mid-November. The shares could find possible support at the nearby $96 mark, however, which represents a 38.2% Fibonacci retracement of BABA's June-to-September rally.

170123 BABA

In the option pits, BABA options are crossing at twice their average intraday rate, with calls leading puts, 74,000 to 47,000. Daily option volume is set to hit the 94th percentile of its annual range. Specifically, today's most active options are the weekly 1/27 100- and 99-strike calls. Although it isn't clear exactly what's happening at each strike, new positions are being initiated at the latter.

However, call buying -- and attention to the 100 strike -- is nothing new for BABA. Drilling down, BABA's leading open interest position is the newly front-month February 100 call -- which has seen a mix of buy- and sell-to-open activity, per data from the major options exchanges. Plus, BABA's 10-day call/put volume ratio at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) shows 2.73 calls bought to open for every put over the last two weeks, a reading that sits in the top 80% of its annual range. Still, BABA's Schaeffer's put/call open interest ratio (SOIR) of 0.95 sits at an annual peak, indicating near-term traders haven't been more put-biased at any point over the last year. 

It's worth noting that short sellers have been piling on BABA. Short interest is up 2.7% over the last reporting period, with shorted shares now accounting for 10.1% of BABA's float. This would take more than two weeks to cover, at BABA's average daily volume. As such, some of the recent call buying -- particularly at out-of-the-money strikes -- ould be attributable to short sellers seeking a pre-earnings hedge.

Whatever the motive, now appears to be an opportune time to buy premium vs. sell it, with BABA's Schaeffer's Volatility Scorecard (SVS) of 75 indicating BABA has tended to exceed option traders' volatility expectations over the last 12 months. In the same vein, its Schaeffer's Volatility Index (SVI) of 30% ranks in the 28th annual percentile, indicating lower-than-average volatility expectations are currently being priced in to Alibaba Group Holding Ltd's (NYSE:BABA) near-term options.

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