Name That Trade – WW JD?

by Dan June 2, 2015 3:55 pm • Commentary

On two occasions over the last 5 weeks I have written about Chinese etailer (JD), here and here. Initially what caught my eye was the stock’s recent and fairly dramatic out-performance compared to Alibaba (BABA), coupled with the build up in call open interest that was from what I could tell bullish positioning.  But back to JD in a moment…

U.S. listed Chinese stocks remain a mystery wrapped in a riddle inside an enigma. Or something like that.  With the Chinese economy sputtering, Chinese equity markets are going bezerk. But there is some fairly divergent price action by some of the largest cap Chinese listed internet ADRs in the U.S.

On the lower end of the spectrum, there are stocks like YOKU, the online video service (think cross between Hulu and Youtube) which Alibaba (BABA) owns 25% of.  The stock has gone from being down 33% on the year in March to now being up 65%:

YOKU 1yr chart from Bloomberg
YOKU 1yr chart from Bloomberg

Others are experiencing similar surges ytd, CTRP up 68%, NTES up 45%, SINA up 35%, QUNR up 62% & WB up 25%.  Maybe not totally nuts when considering that the Shanghai Comp is up 52% year to date and the Tech heavy Shenzen Index is up 114%, but the many of the factors influencing those eye-popping gains in mainland China should have little impact on many of the adrs here.  Exhibit A would be the 10% year to date declines for Alibaba (BABA) and Baidu (BIDU), two on-the-line behemoths in China that sport a combined market cap of $300 billion. If you added up every other Chinese internet ADR market cap they would not come close to this total.

Now back to JD, the second largest e-commerce platform in China, behind BABA. JD sports a $48 billion market cap, and is up 50% so far in 2015.  Taking a quick look at JD’s chart since its IPO a year ago you can see that the build up in call open interest has been met with a very healthy consolidation just above the prior highs:  

[caption id="attachment_54139" align="aligncenter" width="600"]JD since May 2014 IPO from Blomberg JD since May 2014 IPO from Blomberg[/caption]

Options prices seem fair, with 30 day at the money implied vol at about 39% (blue) vs the realized vol at 32% (white) which has been adversely affected by the stock’s previously mentioned consolidation:

[caption id="attachment_54144" align="aligncenter" width="600"]JD 1yr chart of 30 day at the money implied vol (blue) vs realized vol (white) from Bloomberg JD 1yr chart of 30 day at the money implied vol (blue) vs realized vol (white) from Bloomberg[/caption]

We are warming to the idea of playing for a breakout and possibly some silliness, but a foreseeable catalyst. At the moment the stock’s consolidation does not scream long premium strategies.  We might consider call calendars to help finance the purchase of longer dated calls, or possibly in the money call flies.