(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Alibaba Group Holding Ltd. (BABA) has been one of the hottest stocks over the past 52 weeks, with a share price that has risen by just about 100 percent. But those big surges are likely not finished, based on betting in the options market. In fact, some traders are betting shares will rise by nearly 16 percent by mid-April, taking the stock to about $237.
But first, Alibaba will need to dazzle investors when it reports fiscal third-quarter 2018 results on Thursday, February 1. According to YCharts, analysts are looking for the company to report that 3Q revenue grew a stunning 58 percent from a year ago, to $12.27 billion, Meanwhile, earnings are expected to have increased by over 26 percent to $1.66.
When the company reported its second-quarter results on November 1, it crushed analyst estimates by reporting earnings that came nearly 26 percent higher than expectations, while revenue beat estimates by over 6 percent.
Wide Trading Range
The substantial growth numbers and the company’s ability to beat estimates in the past may explain why traders are making such aggressive bets on Alibaba’s stock continuing to rise. (See also: 10 Companies Owned by Alibaba.)
Using the options set to expire on April 20 and the $210 strike price, the long straddle options strategy is suggesting the stock could increase by nearly 16 percent to $237, or it could fall by roughly 11 percent to $183. The cost of buying one put, and one call is about $26.85, giving the stock a huge trading range by the time expiration comes around.
But the number of puts to calls is overwhelmingly bullish, with nearly 10,300 calls contracts of open interest versus only 849 put contracts. That is a notional value for the calls of almost $11.6 million versus 1.3 million, a ratio of nearly 9 to 1.
But go up to the $230 strike price and bets on calls are still being placed, with nearly 10,200 call contracts open. And with them trading at about $5, it means the stock price would need to rise to about $235 just to break even. This represents a notional value of approximately $3 million, a decent size bet, for a strike far out of the money.
Bears In Hibernation
Turn to the put side, and open contracts are much harder to find in size, with 9,700 contracts of open interest at the $170. But the notional value is tiny in comparison, at only $1.9 million.
The bets have been placed, and now Alibaba will need to deliver for any of the bullish bets to pay off.
Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company’s actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer’s bio and his portfolio’s holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.
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