MorningWord 1/6/17: Long Distance Calls to China

by riskreversal January 6, 2017 9:30 am • FREE ACCESS

Last night on CNBC’s Fast Money I highlighted some unusual call options activity on shares of Alibaba (BABA) on a day that Chinese Internet ADRs went nuts here in the U.S., and BABA closed up 4.25%:

Call volume was more than 2x average daily volume with the two most active options being 10,700 of the Jan 100 calls that closed at 39 cents, and 9,400 of the Jan 95 calls trading, and closing at $1.76.  Assuming that much of this activity was buyers opening, playing for continued momentum, note that these options have two very different risk profiles as the 95 calls have about a 50% probability being in the money on Jan expiration close, while the 100 calls have only a 15% probability. That coupled with no identifiable catalyst make Jan near and out of the money calls nothing more than a bet on near term upward momentum continuing.

But the technical set up may be one of the main reasons for the stock’s 7.5% ytd gains, as the stock just blew through the downtrend that had been in place from the stock’s 52 week highs made in Sept:

BABA 1yr chart from Bloomberg

As I stated in the video, the next identifiable catalyst will be fiscal Q3 earnings in the first few days of Feb (yet to be confirmed). If I were inclined to play for continued momentum and a retest of the prior 52 week highs on a beat and raise I might consider call calendars, for example selling the Jan 100 call and buying the Feb 100 call, or look at call spreads in Feb that would capture earnings, say the Feb 95/110 call spread for $3.50 (vs $94.50 stock).

Taking a slightly longer term view, the stock has decent near term support around $85/$90, and a near term upside target of $110, while bulls with a long memory might be eyeing the all time high of $120 from late 2014… shortly after its IPO:

BABA since 2014 IPO from Bloomberg

It’s an interesting chart, and even more interesting if the call buyers are still early in the game. We will be sure to take a closer look prior to earnings