What Alibaba Options Tell Us About Earnings

For such a young stock, Alibaba Group Holding Ltd has plenty of options available

by Adam Warner

Published on Oct 29, 2014 at 7:57 AM
Updated on Jun 24, 2020 at 10:16 AM

Well, we've had five weeks or so of options trading in Alibaba Group Holding Ltd (NYSE:BABA). And -- surprise surprise -- it's a pretty active product.

There are already 13 different expirations available for trading. You can trade weeklies that expire this Friday, and every ensuing Friday through Dec. 1. And you can trade Long-Term Equity AnticiPation Securities (LEAPS) that go out as far as January 2017. That's quite the roster of choices for such a new name. But, hey, we have over a month's worth of volatility history to back us up!

OK, I kid. But, in all fairness, it's a garden variety name so far, in volatility terms (click chart to enlarge):

Alibaba Since IPO

The BABA "VIX" sits at about 46. That's high versus what we know about realized volatility this early, as you can see on the chart. But, BABA has earnings due out next week, so it merits a bit of a premium. It's the company's first report as a publicly traded stock, so it's pretty safe to assume they'll easily beat their number. We don't know how they'll publicly steer guidance, but it's probably safe to assume they'll lowball it like everyone else.

It's too early to figure out what the options say about the earnings. Open interest is pretty good so far across the board, though there's not much out there in the weeklies that expire after earnings.

As far as the monthlies go, the November 95 and 97.50 calls have the biggest open interest. That's now under the market, though it's likely they were at-the-money call speculation when they traded. I'd say that with almost 100% certainty on the 97.50 calls, as BABA has only spent 1.5 days above $97.50 in its history.

By next week, a move to the mid-90s might represent a 10-to-15% decline -- who knows? So, I wouldn't read much into open interest spots just yet. The stock itself acts very well. It busted below the IPO price as the market tanked, but it bounced back in a big way, and is now up about 10%. If memory serves me correctly, the mere listing of BABA was some sort of seminal market-top moment. At least, that's what some pundits said.

And I guess they could prove correct, though it sure seems like it could be more of a coincidence than anything else.

Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.


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