Alibaba Group Holding Ltd (BABA) Option Bull Lowers the Bar

Alibaba Group Holding Ltd (BABA) continues to stare up at multiple layers of technical resistance, prompting one option trader to roll her bullish bet down

Dec 28, 2016 at 3:28 PM
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Alibaba Group Holding Ltd (NYSE:BABA) is trading lower, failing to capitalize on reports its entertainment division -- Alibaba Digital Media and Entertainment Group -- plans to invest $7.2 billion in content over the next three years. At last check, BABA stock was down 0.1% at $87.49 -- staring up at several layers of technical resistance. And while calls are outpacing puts by a 2-to-1 margin in today's low-volume session, it appears the majority of the action is a result of one options trader lowering their bullish expectations for the tech stock.

Specifically, the February 95 and 100 calls are BABA's most active options today, with roughly 10,000 contracts traded at each back-month strike. According to Trade-Alert, the higher-strike calls are being sold to close, while the lower-strike calls are being bought to open -- suggesting one trader is rolling her bullish bet down. If this is the case, the goal is for BABA to topple $95 -- versus $100 -- by the time the back-month options expire at the close on Friday, Feb. 17.

This trend toward calls over puts only echoes the recent action seen in BABA's options pits. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), for instance, speculative players have bought to open 114,260 calls in the past 20 sessions, compared to 64,719 puts. Plus, BABA's gamma-weighted Schaeffer's put/call open interest ratio (SOIR) of 0.78 indicates near-the-money calls outweigh puts among options expiring in three months or less.

This optimism has spilled outside of the options arena, as well. In fact, all but one of the 17 analysts covering the shares maintains a "buy" or better rating. Plus, the average 12-month price target of $120.42 stands at a steep 38% premium to BABA's present perch, and resides in uncharted territory.

What's surprising is that there is this much optimism levied toward a stock that's vastly underperformed on the charts of late. In fact, the shares of BABA are currently staring at a 17.4% fourth-quarter deficit. More recently, the shares fell south of their formerly supportive 200-day moving average, as well as their round 10% year-to-date breakeven level, while the overhead $88 mark represents a roughly 61.8% Fibonacci retracement of the equity's June-September rally. Should the shares of Alibaba Group Holding Ltd (NYSE:BABA) continue to struggle under these multiple technical ceilings, a capitulation by option bulls and/or a round of bearish brokerage notes could apply additional pressure.

daily chart of baba

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