Options activity has been brisk on Chinese ecommerce giant Alibaba Group Holding Ltd (BABA) this week.
Alibaba stock options were among the top five most actively traded yesterday, arriving just behind Apple Inc. (AAPL), Bank of America Corporation (BAC), Ford Motor Company (F), and Amazon.com (AMZN). Total volume swelled to 145,544 contracts, with roughly 66% of those options trading on the call side, according to data from WhatsTrading.com.
While Alibaba stock has been wildly popular among traders since the stock when public on U.S. exchanges in September, there are a pair of stories that may be driving speculation this week. Most prominently, Alibaba has become the new scapegoat in the fight to give states more rights to collect Internet sales tax, taking over for former boogieman Amazon.
According to a CNBC report yesterday, Alibaba has drummed up political fears that Chinese ecommerce sites could reap significant rewards from states unless they are granted more power to collect online taxes. The movement has gained support from a lobbying group whose members include Target (TGT), Best Buy (BBY), and Home Depot (HD).
Second, Alibaba is looking to outdo both Apple and Google Inc. (GOOG) in the connected car sector. The company recently announced a partnership with Chinese company SAIC Motor Corp. Limited to offer an Internet-connected car in 2016. The car is expected to offer Alibaba’s YunOS operating system, cloud-computing services, navigation solutions, as well as other Alibaba applications and features.
Sentiment within the options community surrounding these developments has been quite bullish for BABA stock. Overall, the December/January 2015 put/call open interest ratio has slipped during the past month from a perch near 0.98 to its current reading of 0.61, as call open interest has been added at a faster pace than put open interest. Currently, there are 533,816 calls open in the December/ January series, compared to 327,609 puts.
Digging into the data on Alibaba stock options, peak call open interest totals 52,443 contracts at the January 130 strike, followed by 39,442 contracts at the January 120 strike. Both of these options are currently well out of the money. On the put side, the in-the-money January 130 strike sports peak open interest of 44,523 contracts, while the out-of-the-money weekly Dec. 20 105 put arrives at a distant second with 16,275 contracts in residence.
January implied volatility is pricing in a potential move of about 9.8% over the next month for Alibaba stock, placing the upper bound at $120.85 and the lower bound at $99.15. Technically speaking, a rally above 120 would place the stock in all-time high territory, creating a potential floor of support in the area in the process. Meanwhile, a drop to the 99 region could breach both the century mark and BABA’s budding 50-day moving average.
Options traders looking to position themselves on Alibaba stock over the next month might want to consider siding with the bulls for the time being. The stock has pulled back from its November peak near 120, but the shares are currently rebounding from support after hitting a near-term low.
Taking implieds into account, a January 2015 110/120 bull call spread has a good chance of turning a profit. At the close of trading on Wednesday, this spread was offered at $3.46, or $346 per pair of contracts. Breakeven lies at $113.46, while a maximum profit of $6.45, or $645 per pair of contracts, is possible if BABA stock closes at or above $120 when January 2015 options expire.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
