Option Bulls Blitz Alibaba Group Holding Ltd (BABA)

Option traders expect Alibaba Group Holding Ltd to go deeper into triple-digit territory

Oct 28, 2014 at 11:29 AM
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Chinese e-commerce concern Alibaba Group Holding Ltd (NYSE:BABA) is exploring triple-digit territory for the first time ever. The stock is up 2.3% to flirt with the century mark, after peaking at a record high of $100.50, and option traders are rolling the dice on even more upside for BABA.

So far today, the stock has seen nearly 50,000 calls cross the tape -- about three times the normal intraday pace, and more than twice the number of BABA puts exchanged. Plus, the security's 30-day at-the-money implied volatility (IV) jumped to a record high out of the gate, and was last seen 0.3% higher at 45.3%, reflecting a growing demand for short-term contracts.

Digging deeper, it looks like eleventh-hour option bulls are buying to open the weekly 10/31 100-strike call -- once again the most popular strike thus far -- where IV is higher and most of the contracts crossed on the ask side. By purchasing the calls at a volume-weighted average price (VWAP) of $1.53, the buyers will make money if BABA climbs north of $101.53 (strike plus VWAP) by Friday's close, when the options expire.

In light of BABA's jump today, delta on the weekly call has surged to 0.51 from 0.32 at Monday's close. In other words, the contract has about a 1-in-2 shot of finishing in the money at expiration. Risk, meanwhile, is capped at the initial premium paid for the calls, should the equity retreat into double-digit territory.

Elsewhere, it seems longer-term bulls are buying to open the December 95 and April 105 calls. The buyers of the December-dated calls paid a VWAP of $8.41, making at-expiration breakeven $103.41. Buyers of the April-dated calls paid a VWAP of $7.52, meaning they'll reap a reward if BABA extends its quest for new highs north of $112.52 by April options expiration. Again, the most the buyers can lose is the initial premium paid for the contracts, should the options expire out of the money.

On the charts, Alibaba Group Holding Ltd (NYSE:BABA) is now up 7.9% from its IPO price in mid-September. Bolstering the equity today are hopes for a possible BABA partnership with Apple Inc. (NASDAQ:AAPL), as the CEOs of both companies waxed bro-mantic at a Wall Street Journal event. Looking ahead, Alibaba will step up to the earnings plate for the first time as a publicly traded company the morning of Tuesday, Nov. 4.


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