Alibaba Trader Protects Stock Position With Options

E-tail giant Alibaba Group Holding Inc (BABA) looks sound from a technical perspective, but one trader may be purchasing protective puts

Feb 10, 2017 at 3:15 PM
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Alibaba Group Holding Ltd (NYSE:BABA) has been a solid performer over the past year, with the stock tacking on nearly 70%. However, even though the shares look strong from a technical perspective, it looks like one trader may be looking to hedge her bets with protective puts, considering BABA options are attractively priced right now.

On the Charts

Since its December lows, BABA has been stair-stepping higher, tacking on nearly 20% in less than two months. The shares seem to have found support near the round $100 level since a post-earnings bull gap in late January. What's more, BABA's 10- and 20-day moving averages are also ascending into the area, and could provide a springboard to launch BABA onto its next leg higher. Plus, the $101-$102 area represents a 61.8% Fibonacci retracement of the stock's fourth-quarter slump, and could act as yet another level of support for the shares.


Skeptics Beware 

Of course, another breakout to the upside could spook BABA skeptics. Short interest currently accounts for 10.6% of BABA's float -- or 115.5 million shares – and would take traders nine days to cover, at BABA's average daily volume. If short sellers exit these positions, there's plenty of fuel for BABA's fire.

Breaking Down a BABA Hedge

On the options side, near-term players have been unusually put-skewed, with BABA's Schaeffer's put/call open interest ratio (SOIR) of 0.88 just 10 percentage points from an annual peak. As alluded to earlier, one trader today may have purchased protective puts to insure her BABA shares.

Drilling down, Trade-Alert indicates a speculator likely bought to open one block of 8,169 April 97.50 puts for $2 each, or $1.63 million (number of contracts x premium paid x 100 shares per contract), in what is likely a short-term hedge. If it is a defensive play, the trader wants BABA to continue higher, but purchasing these puts insures a minimum sale price, should BABA shares slip below $97.50 in the short term.

Regardless of motive, now seems to be a good time to buy premium on Alibaba Group Holding Ltd (NYSE:BABA). BABA's Schaeffer's Volatility Index (SVI) of 22% is in the bottom 5% of its annual range, indicating near-term option players are pricing in unusually low volatility expectations for the shares. Meanwhile, BABA's Schaeffer's Volatility Scorecard (SVS) of 89 indicates the stock has tended to exceed volatility expectations over the past 12 months.

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