Big Printin’ – $JD Degrees

by Dan January 25, 2016 3:42 pm • Commentary• Trade Ideas

Chinese economic slowdown apologists point that the adjustment from an industrial lead economy to a services based economy will be a massive boon for consumer facing companies like Alibaba (BABA) and their competitor JD.com (JD). BABA has dominated Chinese eCommerce headlines since its high profile IPO in late 2014, having risen almost 100% from its $68 IPO in its first couple months of trading, the stock now sits some 40% from those all time highs, and is just a couple dollars from its IPO price:

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

While BABA has been all over the place, JD has traded in a fairly narrow range since its May 2014 IPO (at $19), spending most of the last year and a half between $25 and $35, having never broken its IPO price as BABA did this past summer. JD is now trading near the mid point of its historic range ($19 to $38) at $27, just below its average price of $28.50:

JD since May 2014 from Bloomberg
JD since May 2014 from Bloomberg

JD caught my eye today as there was a large opening put seller in the stock.  Shortly after the open when JD was trading $27.12, 40,000 of the Feb 25 puts were sold to open at 56 cents.  What’s interesting about this trade is its size. Coming into today, call open interest dramatically outweighed puts at 351,000 to 97,000, and today’s put sale was nearly 40% of the existing open interest.

If this trade was an outright sale, then this is how the trader makes money on February expiration. If the stock is above $25, then the trader receives the 56 cents, or $2.24 million in premium. If the stock is between $25 and $24.44, then the trader can lose up to 56 cents, and below $24.44, the trader is put 4 million shares of stock and losses dollar for dollar (less the 56 cent cushion of the put sale).

I would also add that this put sale will not catch JD’s next earnings report which is expected in early March, but it will catch BABA’s which is Thursday after the close.