Chinese tech giant Alibaba (BABA) soared on Tuesday, amid news that the company would break into six separate companies. One trader sees further upside ahead as those plans move forward.
That’s based on the August $125 calls. With 140 days until expiration, 9,704 contracts traded compared to a prior open interest of 262, for a 37-fold rise in volume on the trade. The buyer of the calls paid $4.75 to get in.
Shares recently traded for about $99, so the stock would need to rally another 25 percent for the options to move in-the-money. That’s also right at the stock’s current 52-week high of $125.84.
Even with a 15 percent jump on the breakup news, shares are still down about 15 percent over the past year. Revenues have been flat, but earnings grew by nearly 70 percent.
Action to take: It’s possible that the company is worth more than the current sum of its parts. It’s also likely that some companies may be worth less trading on their own.
Given the valuation here at about 9 times forward earnings, there’s still upside either way, which makes shares a worthwhile speculation here.
For traders, the August calls may see further upside in the days ahead, but if the breakup process is going to take time, the pop in shares may quiet back down. Look for a quick, mid-double-digit profit, rather than holding the calls until expiration.
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.