Alibaba Inc.: The One Strangle You Should Know About BABA Options

If you have never heard of Alibaba Group Holding Ltd (NYSE:BABA) until the beginning of 2014, the media coverage surrounding the company in the last three months before the company’s IPO on September 19 would have in no doubt filled you with knowledge about the Chinese retail site. Alibaba debuted on the NYSE on September 19 to take the title of the largest global IPO ever after raising $25B.

Alibaba started way out of the reach of many traders and investors, considering the speed with which its IPO price of $68 per share shot up to $92.70 on the first trading day to reward the early shareholders with an instant 36.3% reward. The share price gained 1.2% on the opening day to close at $92.70. The stock experienced a minor decline in line with the general trend of the market but shares of Alibaba are up 1.34% today to trade around 87.26 per share.

Options provide us with a leverage strong enough to make profits on options of Alibaba without having to rob a bank or dip into our retirement savings. Hence, traders were naturally overjoyed when shares of Alibaba made their debut on Monday. However, I purposely did not enter any BABA trades since Monday because I wanted the euphoria of “new options” to wear off and I wanted to read the market without being distracted by the buzz in the market.

Interesting Observations about BABA Options

While taking objective views at BABA options over the last three days, I made the following observations:

For BABA options set to expire on October 18, the $95 calls were the most popular on the buy side with an open interest of 12,627 while the $80 and $82 puts were the most popular on the sell side with open interests of 9,508 and 9,396 respectively.

For BABA options set to expire on November 22, the $95 calls are the most popular on the buy side with an open interest of 11,751 while the $85 puts are the most popular on the sell side with an open interest of 8,888

For BABA options set to expire on January 17, the $90 and $105 calls are the most popular on the buy side with an open interest of 5,741 and 5,412 respectively while the $75 puts are the most popular on the sell side with an open interest of 3.882.

An Important BABA Strangle to Know

I posit that shares of Alibaba have been trading sideways post-IPO; and thus, it would be smart to have a safety net for potential upside or downside on the stock.

You should definitely consider setting a BABA Strangle by selling the November $85 puts and the November $95 calls. You can sell the $85 puts for $3.40 and the $95 calls for $1.95 to net a total of $5.53 multiplied by any number of contracts you sell and by 100. Selling 50 contracts for strangle should net you $27,650, which you can keep if shares of Alibaba are between $85 and $95 on November 22. However, you could be in trouble waters if shares of Alibaba should rise above $96.95 or if the stock falls below $88.40 by expiration.

— Daily Option Alerts

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  • Alexander Kordick

    You should definitely consider setting a BABA Strangle by selling the November $85 puts and the November $95 calls. You can sell the $85 puts for $3.40 and the $95 calls for $1.95 to net a total of $5.53 multiplied by any number of contracts you sell and by 100. Selling 50 contracts for strangle should net you $27,650, which you can keep if shares of Alibaba are between $85 and $95 on November 22. However, you could be in trouble waters if shares of Alibaba should rise above $96.95 or if the stock falls below $88.40 by expiration.

    THAT IS NOT TRUE DUE TO MY EXPERIENCE! The SOLD 85 NOV PUTS are endangered at 81.60 and under. Not at 88.40

  • Bonk

    Wow – anybody who sold those 95’s is in a world of hurt right now with the stock at 115. ouch – a loss of 2K-195/contract