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A Look At Some Large Alibaba Option Trades

Wayne Duggan

Alibaba Group Holding Ltd (NYSE: BABA) shares have held up relatively well up to this point in 2019 considering the beating other Chinese stocks have taken as the trade war between the U.S. and China has ramped up.

Alibaba's stock jumped 4% on Tuesday, but some large bearish trades in the options market Tuesday morning suggest the optimism may be misguided.

The Trades

On Tuesday morning, Benzinga Pro subscribers received a series of options alerts related to Alibaba.

At 9:39 a.m., a trader bought 576 put options with a $177.50 strike price expiring on July 5 at the ask price of $14.35. The trade represented an $826,560 bearish bet at a break-even price of below $163.15.

Between 9:51 a.m. and 9:55 a.m., there were three large sales of Alibaba call options with a $175 strike price expiring on July 12 at bid prices ranging from $2.23 to $2.26. All together, the seller dumped 1,500 July 12 call options, a total bearish bet of more than $334,000.

A final trade went through about an hour later when a trader purchased 1,051 Alibaba put options at a $167.50 strike price that expire on Friday. The puts were purchased at the ask price of $2.252 and represent a roughly $236,685 bearish bet with a break-even price of below $165.25.

After all was said and done, the trading action represented an aggregate bearish bet of roughly $1.4 million on Alibaba.

Why It's Important

Even traders who stick exclusively to stocks often monitor option market activity closely for unusually large trades. Given the relative complexity of the options market, large options traders are typically considered to be more sophisticated than the average stock trader.

Many of these large options traders are wealthy individuals or institutions who may have unique information or theses related to the underlying stock.

Unfortunately, stock traders often use the options market to hedge against their larger stock positions, and there’s no surefire way to determine if an options trade is a standalone position or a hedge. In this case, given the relatively large sizes of the Alibaba options trades, as well as the manner in which the large call sale was broken up into a series of three smaller orders, the trades could potentially represent institutional hedges against large bullish stock positions. Institutions often break up large orders into a series of smaller orders in an attempt to avoid drawing attention to their activity.

Trade Deal Optimism Overdone?

Assuming Tuesday’s trading action did not represent hedging, options traders seemed decidedly bearish about Alibaba and the potential for the U.S. and China to make meaningful progress toward a trade deal in the next month.

On Tuesday, U.S. President Donald Trump said he had a productive phone call with Chinese President Xi Jinping and the two plan to meet at the upcoming G-20 summit that begins on June 28. In the meantime, representatives from both nations will resume trade talks.

The latest trade war news comes after Alibaba disclosed in a recent filing that it's proposing a one-to-eight stock split ahead of a rumored public listing in Kong Kong. In addition, Alibaba announced on Tuesday that CFO Maggie Wu would be taking over as the head of the company’s strategic acquisitions and investment unit.

Alibaba traded around $165.94 per share at time of publication.

Disclosure: The author holds a long position in Alibaba.

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Photo credit: Andy Mitchell, Flickr

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