In case you missed it, weak manufacturing data out of China, released overnight, has put global markets in a bit of a mood. The S&P 500 (SPX) is set to have its worst first trading session of the year since January 3rd 1932 when the index dropped a whopping half a point from 8.12 to 7.56! And you know what happened for the rest of the year, after that nearly 7% drop on the first day of trading? Basically nothing, the SPX closed down 8% on the year:
The price action in the Shanghai composite into its close overnight was not underwhelming, dropping a couple percent into its circuit breaker, and closing the session locked down, nearly 7% from its 2015 close.
Chinese ADRs here in the U.S are getting blasted with stocks like Alibaba (BABA) which closed down 22% in 2015, shedding 6% today as I write, and upstart e-commerce competitor JD.com (JD), which closed up 40% in 2015, losing nearly 10% in today’s trading.
Both stocks are seeing some hefty options activity, but oddly both are seeing call activity nearly 2x that of puts.
In the case of BABA, there is clearly some closing action in calls. But one particular trade caught my eye. Shortly after the open, when the stock was $77, a trader paid $1 for 2000 of the January 29th weekly expiration 85 calls to open. These calls break-even at $86 on Friday Jan 29th, the day which Bloomberg estimates the company to report Q4 results (they reported that day last year). The chart (below) of the stock since its September 2014 IPO is fairly interesting. Today it gapped below a very important long tech technical support level at $80:
Despite options prices ticking up, with 30 day at the money implied vol nearing 45%, and about 10% from its 52 week highs, long premium could be the way to play for those making directional bets with an inclination to define ones risk:
Despite call volume at 46,000 to 17,000 puts, JD’s sharp decline has caused at least one investor to either protect an existing stock position, by slapping on a collar on 700,000 shares, or make an outright bearish bet. When the stock was $29.60 at 11am a trader sold 7,000 of the February 5th weekly expiration 32 calls at 70 cents to open, and bought 7,000 of the February 5th weekly 26 puts for .65 cents to open. If the stock is 32 or higher on Feb 5th expiration the trader would be short at that level or above, but if long have gains in the stock capped at that level. If the stock is $26 or below, the trader will have either protection if long, or have gains from the long put position. Between 26 and 32 the trader would collect 5 cents, the difference between the call premium received and the premium paid for the puts. The choice of weekly puts in Feb is interesting as the company is not expected to report earnings until late Feb or early March.
The chart of JD since its May 2014 IPO at $19 is interesting as the stock was recently rejected in the low $30s, near its 2014 high, and has broken the uptrend that has been in place since its August 2015 lows.
The trader of this collar/risk reversal, may be targeting what could be important technical support in the mid $20s.