Call Buyers Target Heavily Shorted Alibaba Stock – Schaeffers Research (blog)

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Options volume has been notably heavy in recent weeks on Chinese e-commerce stock Alibaba Group Holding Ltd (NYSE:BABA) and Snapchat parent Snap Inc (NYSE:SNAP), with call traders driving the action on both names. Here’s a closer look at how options traders have been positioning themselves on BABA and SNAP. 

The 20 stocks listed in the table below have attracted the highest total options volume during the past 10 trading days. Data is courtesy of Schaeffer’s Senior Quantitative Analyst Rocky White.

options volume

BABA Call Volume Pops as Stock Explores New Highs

Since skimming the $86 level in late December, Alibaba stock has been flying higher. With its 20- and 30-day moving averages serving as a double-barreled springboard, the security has more than doubled in value to trade at $178.69 — tagging a record high of $179.93 last Thursday.

What’s impressive is that this rally in BABA shares has come amid some intense selling pressure among short sellers. Short interest on BABA edged up 2.8% in the latest two-week reporting period to 136.75 million shares, just shy of the record 140.81 million shares from the July 15 reporting period. This equates to $23.39 billion, according to Schaeffer’s Quantitative Analyst Chris Prybal, making it the most shorted stock we track, from a dollar perspective.

Options traders, on the other hand, have displayed a bias toward bullish bets in recent weeks. Specifically, speculative players have bought to open 2.23 calls for every put at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) in the last 10 trading sessions.

The stock’s October 175 call was the most heavily traded contract over this time frame among options that have yet to expire, with 40,081 contracts exchanged. Data from the major options exchanges confirms buy-to-open activity here, indicating expectations for a bigger rise north of $175 through the close on Friday, Oct. 20 — when the front-month options cease trading.

Short-Term Snap Options are Relatively Cheap at the Moment

Snap shares bottomed at a record low of $11.28 on Aug. 14, but have since added nearly 33% to trade at $14.97. This rebound has coincided with a sharp rise in short interest, with these bearish bets up 36% in the most recent reporting period to 94.62 million shares — a record high. Per data from Prybal, this accounts to a dollar value of $1.35 billion, a significant amount of sideline cash to help fuel a bigger bounce.

In the options pits, SNAP’s October 15 call has seen the heaviest volume in the past two weeks among strikes that have not yet expired, with 16,423 contracts traded. This strike is now home to 17,387 contracts, with data from the major options exchanges confirming a mix of buy- and sell-to-open activity here. Those buying the calls are betting on SNAP surging north of $15 in the next five weeks, while those writing the calls expect the strike to serve as a short-term ceiling.

Now appears to be a more attractive time to buy premium on SNAP’s short-term options, though, rather than sell it. The stock’s 30-day at-the-money implied volatility was most recently seen at 48.8% — not far from its June 6 record low of 46.1%. In other words, tempered volatility expectations are being priced into near-term Snap options, a potential boon to options buyers.

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