Alibaba Presents a Unique Opportunity For Thrifty Options Traders

Alibaba Group Holding Ltd (BABA) stock could break out on a short-squeeze rally

Mar 7, 2017 at 2:10 PM
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Alibaba Group Holding Ltd (NYSE:BABA) burned higher to begin 2017. The stock ended 2016 south of $90, but reached triple digits by Jan. 24. Since then, BABA shares have been consolidating their gains, and based on volatility data from Schaeffer's Senior Quantitative Analyst Rocky White, it may be time for options traders to strike.

As with Apple Inc. (NASDAQ:AAPL) options, near-term calls and puts are relatively cheap on the Chinese e-tailer. In fact, BABA emerged on White's short list of stocks that sport a Schaeffer's Volatility Index (SVI) in the bottom tenth of the annual range and a Schaeffer's Volatility Scorecard (SVS) above 80. All the names he surveyed also traded above $8 per share and averaged at least a million shares exchanged per day, with no fewer than 5,000 options in open interest (plus, a minimum of 1,000 calls and 1,000 puts).

Specifically, BABA's SVI of 21% is docked below 97% of comparable readings from the past year, suggesting options expiring in the next three months are attractively priced, from a historical perspective. Echoing this, Alibaba's 30-day at-the-money implied volatility of 21% is in the low 1st percentile of its 52-week range, and earlier touched an annual low. Not to mention, the stock's SVS of 88 indicates the shares have outperformed volatility expectations in the last 12 months.

So, how have options traders been betting on BABA? Based on data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), they've been blazing a bullish path. Specifically, the stock's 10-day call/put volume ratio is a top-heavy 2.96, outstripping nine-tenths of readings from the past year. Today, in fact, buy-to-open activity is transpiring at the weekly 3/10 104-strike call.

Of course, ulterior motives could always be driving call buyers at out-of-the-money strikes, especially when short interest is elevated. This happens to be the case on BABA, as 10.4% of its float is sold short. At the stock's average trading rate, it would take close to three weeks to buy back these positions -- suggesting some of these bears may have purchased calls as upside insurance.

On the other hand, unhedged short sellers could be forced to cover if Alibaba Group Holding Ltd (NYSE:BABA) breaks out of its consolidation pattern in the $100-$105 range, last seen up 0.7% at $103.07. From a contrarian perspective, this bodes well for BABA shares, which could benefit from a short-squeeze.

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