Options Hot on 2 Surging Chinese Stocks

Morgan Stanley is bullish on Chinese stocks right now

by Karee Venema

Published on Dec 3, 2018 at 1:25 PM

Easing trade tensions between the U.S. and China are boosting global markets today, with the Dow up triple digits at last check. And with Morgan Stanley raising its base case for Chinese stocks after the "better-than-expected" outcome of the G-20 summit, e-commerce concerns Alibaba Group Holding Ltd (NYSE:BABA) and JD.com, Inc. (NASDAQ:JD) are soaring, with both stocks seeing accelerated options trading, as well.

However, this heavy options volume is more of the same for BABA and JD, which both popped up on Schaeffer's Senior Quantitative Analyst Rocky White's list of 20 stocks that have attracted the highest options volume during the past 10 trading days. (Names highlighted in yellow are new to the list.)

most active stock options volume dec 3

Bears Blast Alibaba Stock

Although calls were slightly more popular than puts on an absolute basis in Alibaba Group's options pits, put buyers were unusually active in recent weeks. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), BABA stock's 10-day put/call volume ratio of 0.85 ranks in the 98th annual percentile, meaning puts have been bought to open relative to calls at a quicker-than-usual clip.

Today, roughly 136,000 puts and 136,000 calls have changed hands -- nearly two times what's typically seen at this point. The weekly 12/28 149-strike put is popular, and it looks like new positions are being purchased for a volume-weighted average price (VWAP) of $1.62. If this is the case, breakeven for the put buyers at the close on Friday, Dec. 29, is $147.38 (strike less premium paid).

At last check, BABA stock is trading up 2.6% at $165.08, and has now gained nearly 27% since bottoming at a 16-month low of $130.06 on Oct. 30. However, the shares are running out of steam in the $168-$170 region, home to their 120-day moving average, and early September bear gap high.

JD.com Bulls Bet on Bigger Bounce

Options bulls have been more active than usual toward JD.com in recent weeks, per the stock's 10-day call/put volume ratio of 3.73 at the ISE, CBOE, and PHLX -- in the 71st percentile of its 12-month range. Echoing this is the equity's Schaeffer's put/call open interest ratio (SOIR) of 0.58, which registers in the 11th annual percentile. What this means is that short-term traders are more call-skewed than usual toward JD.

This trend is being continued today, with around 47,000 calls on the tape -- 1.2 times the expected intraday amount -- compared to roughly 17,000 puts. While the January 2019 25-strike cal is most active, nearer-term traders are targeting the December 22.50 call. Based on the option's VWAP of $0.93, those buying the call expect JD to break out above $23.43 (strike plus premium paid) in the next few weeks.

JD.com stock is up 3.4% this afternoon at $21.97. The shares have been making a beeline lower since their mid-June peak at $45.23, and hit a record low of $19.21 on Nov. 23 after the company's revenue miss. Earlier today, the stock topped out at $22.49, while just above here is familiar resistance at its 40-day moving average.

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