All eyes are on Alibaba Group Holding Ltd (NYSE:BABA) as the Chinese e-commerce giant prepares to release its latest earnings data Thursday morning. Tomorrow’s festivities mark BABA stock’s second earnings release since going public last September.
Since its IPO, BABA stock has delivered respectable gains to shareholders, but its performance over the past quarter has been somewhat of a circuitous route to nowhere.
In the weeks following Alibaba’s last earnings announcement a groundswell of buying rapidly drove shares 20% higher to $120. Once the euphoria died down, however, BABA stock began a steady descent that has, ironically, returned it to the exact same price level it sat at prior to its last earnings release.
While it remains to be seen if last quarter’s post-earnings rally will be duplicated, the options market does provide some clues regarding traders’ expectations.
The Jan 30 strangle is pricing in a $6 move in BABA stock for the rest of the week. On a percentage basis that’s a mere 4% move for the $102.50 share price. With estimates so muted, don’t expect any major fireworks tomorrow.
Not that any of this is very surprising. The volatility in BABA has been quite tame over the past quarter, and BABA stock only moved 4% the day following its last earnings release, so these expectations seem par for the course.
Alibaba Earnings Plays
With implied volatility sitting in the middle of its range and option prices seemingly in line with BABA’s recent behavior, it’s tough to make the case that options are dramatically over- or underpriced. If you have a directional bias on the stock but want to hedge your bets by structuring a higher-probability trade, consider either a bull put or bear call spread.
Bulls can sell the Feb $93/$89 put spread for 88 cents credit. Consider it a bet that BABA stock remains above $93 by Feb expiration. The reward is limited to the 88-cent credit. The risk is limited to the distance between strikes minus the 88-cent credit, or $3.12, and will be lost if BABA falls below $89.
Bears can sell the Feb $111/$115 call spread for 40 cents credit. Consider it a bet that BABA stock remains below $111 by Feb expiration. The reward is limited to the 40-cent credit. The risk is limited to the distance between strikes minus the 40-cent credit, or $3.60, and will be lost if BABA rises above $115.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.
