Alibaba Options Traders Betting on a Bullish Jump

In the October 18 trading session, Alibaba Group Holding Limited (BABA) stock is trading at $170.14, down 3.79% from the previous session, at the moment of writing. This performance lagged behind the S&P 500’s 0.21% decrease on the day. The Dow Jones plunged 0.66% while the Nasdaq lost 0.66%.

In addition, Alibaba stock has returned -1.8% over the past month, which shows that BABA stock outperformed the online retail industry. The industry returned -1.9% at the same time.

There have been several bullish bets placed on Alibaba stock, suggesting that it could surge higher in the coming weeks and months. Having said that, I’d like to discuss the stock’s recent options trades and what they mean for investors. 

12% move in Alibaba stock

The implied volatility for the options, at a $170.00 strike price that expires on January 17, 2020, stands at 31.96%. This number means investors are expecting an event that could cause modest movement in one direction or the other.

Looking at the January 17 options, I see a bid/ask for the $170.00 call option of $ 10.75/$ 10.90. Also, I see a bid/ask for the $170.00 put option of $ 9.75/$ 9.90. Keep in mind that the options strike closest to the BABA price of $170.14 at the moment of writing. We can calculate the expected price move using the mid-prices of these options:

9.825 (170.00 Put) + 10.825 (170.00 Call) = 20.65/170.14 = 12.13%

The options imply, as you can see, that BABA stock could rise or fall by ~12% by the January expirations from the $170.00 strike price. This estimation uses the long straddle strategy. This assessment would place the stock in a trading range of $149.6 to $190.4 by the expiration date.

Moreover, the calls at the $170.00 strike price outweigh the put options about 2:1 with 22,028 open calls to 13,747 open puts. Moreover, the calls at the $180.00 strike price outweigh the put options about 2 to 1 with 15,502 open calls to just 7,760 open puts.

A buyer of the $180 strike price calls would need the stock to rise to around $186.45 by the expiration date to break even. This imbalance suggests more bearish market sentiment on Alibaba stock.

Bullish options bets for BABA

The options, which expire on November 15, saw increased call buying over the past week. The open interest for the $200.00 calls rose by 2,213 contracts to a total of 10,720 open contracts (source: barchart.com). A buyer of those calls would need the stock rise to $200.27 by the expiration date, and that would mean a gain of about 18% from BABA stock’s current price.

Plus, the open interest levels for the November 15 $180.00 calls saw bullish activity over the past two weeks. According to barchart.com, the open contracts rose by 2,133 contracts to about 12,247. A buyer of the calls would need the stock rise to $182.75 by the expiration date, a gain of about 7.5% from BABA stock’s current price.

Finally, in the October 18 trading session, the open interest for the $155.00 calls that expire on January 17, 2020, rose by 20,226 contracts. This rise brought the total to 20,797 open contracts. A buyer of the calls would need the stock rise to $175.35 by the expiration date, a gain of about 3.1% from BABA stock’s current price.

Analysts’ coverage and target price for Alibaba stock

Wall Street analysts have upgraded BABA over the last six months. For Alibaba stock, the consensus price target stands at $223.48, which represents a 31.18% upside. See MarketBeat for a detailed breakdown. According to TipRanks, BABA is a “strong buy” with an average price target of $223.47, representing 31.59% upside. Moreover, among 16 analysts covering BABA, all 16 recommended it as a “buy.”

Please read China Trade Deal: Will Uptrend in Chip Stocks Continue? to learn more about how trade deal optimism can support the further rally in stocks like BABA, JD.com, and more.