Options Traders Reach For Calls as BABA Stock Booms

BABA call buying was accelerated in the past two weeks

by Lillian Currens

Published on Mar 4, 2019 at 1:21 PM

The shares of Alibaba Group Holding Ltd (NYSE:BABA) are extending their rally today -- up 0.9% at $185.46, at last check -- in the wake of BABA's partnership with Office Depot (ODP). The two companies plan to launch a co-branded website specializing in online sales to small- and medium-sized U.S. businesses. The Chinese e-commerce giant also announced that its offshoot website, Tmall, expects 1,000 shops to be opened on its platform this year by cosmetics brands, including flagship stores from Tom Ford and Procter & Gamble's new line, Oriental Therapy. 

BABA stock has enjoyed almost 10 consecutive days of gains, save for a slight drop on Feb. 28 -- a bullish streak that has likely spurred a surge in call options activity of late. The equity showed up on Schaeffer's Senior Quantitative Analyst Rocky White's list of stocks that have attracted the highest options volume during the past 10 days, with names highlighted in yellow new to the list. Per the chart below, 644,148 BABA calls have crossed the tape over this time frame, compared to just 354,140 puts. 

Most Active Options March 4

Digging down to data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), traders bought to open 2.45 BABA calls for every put in the same time frame. This 10-day call/put volume ratio sits in the 82nd percentile of its annual range, confirming a healthier-than-usual appetite for bullish bets over bearish of late.

Its recent rally has helped BABA stock gain roughly 43% from its Dec. 24 annual low of $129.77. The shares have enjoyed some support at the 10-day moving average on their rebound, and just gapped above the $180 area last week for the first time since September. The equity is well on its way to its biggest quarterly gain since late 2015, too -- up roughly 35% since the start of the year. 

BABA Chart March 4

While short sellers are starting to hit the exits -- short interest has dropped 2% in the past two reporting periods -- there's still plenty of room for a short squeeze rally to play out. The 114.2 million shares sold short make up a healthy 8.4% of the stock's available float. It would take over two weeks to buy back all of these bearish bets at Alibaba's average daily trading volume. 

In fact, some of the recent crop of BABA call buyers could actually be short sellers looking to hedge their bets against a continued rally. By purchasing calls on the stock, anxious bears can maintain their short exposure, but limit their risk on an upside move for a relatively modest upfront expense -- namely, the cost of the option premium.

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