Unusual Options Activity: Alibaba (BABA)

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  • Traders are betting on a big move lower in Alibaba (BABA). Over 2,300 contracts traded against an open interest of 133, making for a 19-fold rise in volume.

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  • The contracts were for June 2022 $275 puts. With shares trading around $278, these at-the-money puts should move penny-for-penny higher as the stock goes lower. The option has 625 days until expiration.

    This kind of big, at-the-money, long-dated bet suggests someone expects a drop in the price soon, offering a relatively safe way to enjoy profits as the stock declines. It may be part of a broader hedging strategy as well, given the long-dated nature of the options.

    Given the number of contracts on this far-dated option, it’s likely a fund looking to profit from the downside at best, and hedge against the overall market, or against an economic slowdown in China where Alibaba does its business. With shares at 42 times earnings, it’s certainly not cheap, so a big selloff is definitely on the table.

    Action to take: The trade is interesting, but with a bid/ask spread around $46.50, it’s a bit expensive for retail investors looking for a quick downside.

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  • Consider the February 2021 $230 puts instead. That can still bet on a downside, but at the more accessible price per contract of around $8.00 instead. Should shares dive enough and quickly, these options will offer a bigger percentage return than the pricier at-the-money June 2022s.