Alibaba (BABA) Earnings Trade Updates

by riskreversal November 2, 2016 12:33 pm • Trade Updates

Yesterday we previewed of Alibaba’s Q3 results (released this morning). The stock is initially opened higher after the company beat expectations:

Alibaba posted earnings of 5.26 yuan per share, up from 3.61 yuan a share a year ago.

Revenue increased 55 percent to 34.29 billion yuan from 22.17 billion yuan in the year-earlier period.

Analysts expected the company to post adjusted earnings of 4.68 yuan a share on revenue of 34.02 billion yuan, according to a Thomson Reuters consensus estimate.

But the stock is now down on the day. With the run up in shares from $60 in early 2016 to around 100 into the event we thought it was possible there was a sell the news situation or even worse a steep decline on a miss. Therefore we detailed two trade ideas, the first as a stock alternative that defined risk and targeted a realistic move back towards the 2016 highs, and also a disaster hedge for long stock holders that sold a call at the all time high and protected below in case the stock broke the $90 support level into 2017.

Let’s first look at the stock alternative:

Bullish/ Stock Alternative:

Buy the BABA ($100.70) Dec 100/110/120 call butterfly for 2.40
  • Buy 1 Dec 100 call for 5.40
  • Sell 2 Dec 110 calls at 1.70 (2.40 total)
  • Buy 1 Dec 120 call for .40

With BABA lower by almost $3 at $98, this Dec call fly is worth about 2.15, so no real harm/foul. The reason this trade did alright even though the stock is down is it was basically vol neutral with the sale of the 110 calls x2. And the deltas of the entire trade was small because it was out in December. A same strike call fly in November would have done worse because it would have been more long vol, and more deltas, with less time to play out. As far as trade management this is a trade you may just want to close for the small loss and look for a nice entry lower, or you can roll down the 110 and 120 strikes (or even the entire trade) to be there for any bounce back above the 100 level while reducing premium at risk.

The second trade idea to look at is the collar:


vs 100 existing shares of BABA ($100.70) sell 1 Jan 120 call and buy 1 of the Jan 90/75 put spread for .90
  • Sell 1 Jan 120 call at .80
  • Buy 1 Jan 90 put for 2.15
  • Sell 1 Jan 75 put at .45

This is fairly far out and is good to have on not just for the event but in case the market corrects into, our just out of, the New Year. The short 120 call is the all time high and unlikely to come into play. But by spreading the puts we were able to get closer to where the stock is trading and provide some decent protection in case of a break down. With the stock $98, the put spread collar is worth about about 1.70 vs the .90 initial cost. So it’s helped soften the decline a little bit but it’s intention is protection against a larger move, and it has all the way until Jan expiration to do that. As far as trade management, the 120 call could be closed and rolled down to the 110 or 115 line, that would reduce premium risk to nothing (or next to nothing in the case of the 115s), and if the stock closed above 90 or below the new short call strike you wouldn’t lose the 90c initially risked. On the downside this is set-up quite well and will be nice to have if the stock tests that 90 level in the next few months.