Unusual Option Activity: Alibaba (BABA)

Chinese e-commerce platform Alibaba (BABA) is down 15 percent over the past year, as China’s economy has failed to grow faster following the end of its pandemic lockdowns. One trader sees a further decline in the coming weeks.

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  • That’s based on the January 26 $69 puts. With 24 days until expiration, 7,091 contracts traded compared to a prior open interest of 239, for a 30-fold rise in volume on the trade. The buyer of the puts paid $0.42 to make the bearish bet.

    Alibaba shares recently traded for about $77. So they would need to drop $8, or about 10 percent, for the option to move in-the-money. The strike price of the option is just below Alibaba’s 52-week low of $70.08.

    Besides the concern about China’s economy slowing, the company has remained unprofitable over the last year, even as revenues have risen by 9 percent.

    Alibaba now trades at less than 8 times forward earnings, but that’s close to its forward valuation over the past year.

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  • Action to take: Investors may want to shy away from shares for now. Despite a reasonable valuation, shares are in a downtrend, and until the company can improve its earnings and make a profit, the downtrend is likely to continue.

    For traders, the January puts are inexpensive enough for high-double-digit returns in the coming weeks. Traders will need to be nimble as there’s little time premium left on the trade.


    Disclosure: The author of this article has no position in the company mentioned here, but may trade after the next 72 hours. The author receives no compensation from any of the companies mentioned in this article.

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