Traders May Be Buying Options Hedges on These Tech Heavyweights

Both Facebook and Alibaba stocks are getting positive attention from Third Point

Managing Editor
Aug 14, 2017 at 3:13 PM
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Options volume has been notable lately on FAANG stock Facebook Inc (NASDAQ:FB) and Chinese internet issue Alibaba Group Holding Ltd (NYSE:BABA), with call volume exceeding put volume on both stocks. Here's a quick look at how options traders have been placing their bets on these two popular tech names, both of which attracted the attention of hedge fund Third Point in the second quarter. 

The 20 stocks listed in the table below have attracted the highest total options volume during the past 10 trading days. Stocks highlighted are new to the list since the last time the study was run, and data is courtesy of Schaeffer's Senior Quantitative Analyst Rocky White.


MAO Aug 14

Put Buying Picking Up Steam on Facebook Stock

Third Point upped its stake in Facebook stock by 16.7% to 3.5 million shares in the second quarter, according to recent SEC filings. The decision bears even more weight given Third Point's recent break from fellow social media stock and Snapchat parent Snap.

It's been an outstanding year for Facebook stock, which has tacked on 48% year-to-date, with pullbacks contained by its 60-day moving average. Today, FB stock is up 1.7% to trade at $170.44, and the shares could resume their quest for record highs, if past is prologue. Specifically, Facebook has been one of the best stocks to own after a major CBOE Volatility Index (VIX) spike, historically.

In the options pits, traders have been favoring calls on an absolute basis. Over 775,00 Facebook calls have been traded in the past 10 days, compared to 499,114 puts. However, put buying has grown more popular than usual lately. Data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) shows FB with a 10-day put/call volume ratio of 0.71, which ranks in the 93rd percentile of its annual range. 

Considering FB stock's rally, the recent flurry of put buying could be Facebook shareholders looking to hedge their bets. By purchasing protective puts, FB shareholders can lock in an attractive point at which to sell their shares, should the security take a turn for the worse.

Options Traders Loving Alibaba

Alibaba stock is currently up 2% to trade at $154.25, after Dan Loeb's Third Point re-initiated a stake with 4.5 million shares of the Chinese e-commerce concern in the second quarter. "We believe now is the time to own Alibaba again," wrote the hedge fund. "Alibaba is currently at a positive inflection point after rolling out significant changes over the past year to its advertising platform, which currently generates the majority of the company’s revenue."

Overall, it's been an outstanding year for BABA stock, which has tacked on 76% year-to-date and hit a new record high of $160.39 on July 27. The shares have outperformed the broader S&P 500 Index (SPX) by more than 21 percentage points during the past three months.

It's no surprise that options traders are leaning toward calls. In the past 10 days, 767,572 Alibaba calls have been traded, compared to 361,880 puts. The rate of call buying has been accelerated, too, as BABA's 10-day call/put volume ratio of 2.87 is in the 69th percentile of its annual range.

It's worth nothing that short interest on Alibaba represents nearly nine sessions' worth of pent-up buying demand, at the stock's average pace of trading. Against this backdrop, it's possible that some of the call buying of late -- particularly at out-of-the-money strikes -- could be attributable to short sellers seeking an options hedge. The good news for "vanilla" options traders is that BABA's Schaeffer's Volatility Scorecard (SVS) sits at an impressive 93, indicating Alibaba stock has tended to exceed option traders' volatility expectations during the past year.

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