Big Printin’ – Alibaba (BABA)

by Dan September 6, 2016 2:44 pm • Big Printin'

Shares of Alibaba (BABA) are up more than 4% today, trading at a new 52 week high. BABA is up 28% on the year, and up 82 from its 52 week and all time lows made in late September 2015.  The stock now above $100 has little overhead technical resistance til $110, and then the all time highs at $120 made in November 2014:

BABA since Sept 2014 IPO from Bloomberg
BABA since Sept 2014 IPO from Bloomberg

Call volume went bezerk today, at 1.5x average daily volume, and more than 2x that of puts. The ten most active strikes were all calls, with Sept dominating the action with 24,000 of the Sept 105 at the top of the leader board, followed by 16,000 of the Sept 100 calls trading,

Shortly after the open there appeared to be a bullish roll when the stock was $102, a trader sold to close 1,100 Sept 100 calls at $2.90, or about $320,000 in premium and bought to open 5,000 of the Sept 105 calls for 70 cents, or about $350,000 in premium.

The next identifiable catalyst for BABA will be Q4 earnings expected the last week of October, and then Singles Day on November 11th.

If you have a directional inclination in BABA and looking to express that view with options, then defined risk plays in November expiration (which captures the two events listed above) is the own.  30 day at the money implied volatility has picked up in the last couple weeks from all time lows, as realized volatility has picked up.  November at the money implied vol is about 30%, below current realized and just 4 points above 30 day, it appears cheap, especially when you consider how far the stock has come in the last two months:

BABA 1yr chart of 30 day at the money IV (blue) vs Realized (white) from Bloomberg
BABA 1yr chart of 30 day at the money IV (blue) vs Realized (white) from Bloomberg

BABA has been a story that has been easy to love to hate, but with the stock trading at 32x expected fiscal 2017 eps growth of 23%, and sales growth of 43%, valuation is not nuts.  But lets not forget about the newsy spring the company had, from my post on June 14th:

Shares of Alibaba (BABA) are up 3.5% today on news that the company guided fiscal 2017 revenue growth of 48% (well above the existing consensus of 35% annual growth). What’s interesting about the timing of this outlook is the fact that this is the first instance in which the company has given forward guidance since their IPO in September of 2014. It comes at a time when the company’s transparency and adherence to U.S. accounting practices are being investigated by the SEC.  Shares of BABA have been volatile of late, trading in a range between $75 and $85 over the last couple months with a recent test when BABA’s largest shareholder Softbank a couple weeks ago announced that they would sell $10 billion worth of their BABA stake, a secondary offering in which, per the WSJ:

Alibaba has agreed to repurchase 27 million shares from SoftBank for $74 each, for a total of $2 billion, while the company’s partnership of founders and managers has agreed to purchase 5.4 million shares for the same price, for a total of $400 million.

Just another reason why options appear cheap given the potential for tape-bombs on the accounting front.