BABA Singled Out

by Dan November 11, 2020 2:17 pm • Trade Ideas

Alibaba (BABA) has concluded its Singles Day where the Chinese e-commerce behemoth registered their largest one day pull for this event even, topping $75 billion, but this week investors have been more focused on regulatory hurdles facing the company, per WSJ:

But growing regulatory pressure on a popular way that shoppers fund purchases on Alibaba’s e-commerce sites and new draft rules proposed Tuesday to curtail the influence of internet companies cast a shadow on the event—and the business model that has made the empire founded by entrepreneur Jack Ma a global force.

Since last week, when regulators halted the initial public offering of Alibaba-backed payment platform Ant Group, Alibaba’s New York-listed shares have fallen 16%—erasing $137 billion from its market value, according to Refinitiv data—reflecting in part investor concerns about a raft of regulatory actions.

In the last two weeks, shares of BABA have sold off 17% from an all-time high and are now flirting with the uptrend from its March lows. Below the uptrend, the next level of support is near $240, down about 10%, the breakout level to new highs in early July and also the stock’s 200-day moving average:

 

Short-dated options prices have risen substantially with the stock’s drop, with 30-day at the money implied volatility just below 50%, making long premium directional trades challenged

 

So what’s the trade?

If you were of the mindset that the Chinese regulatory pressure was going to be short-lived and BABA will be able to realize their gains in Ant soon enough and that the stock might have some further downside near-term, but likely to find support near $240, then selling downside puts to finance the purchase of upside calls, a risk reversal might make sense in December expiration, for instance:

Bullish Trade Idea: BABA ($267) Buy Dec 245 – 290 risk reversal for even money

-Sell to open 1 Dec 245 put at $7.25

-Buy to open 1 Dec 290 call for $7.25

Break-even on Dec expiration:

Profits above 290

Losses below 245, put 100 shares on Dec expiration per 1 contract short below 245. can always cover to close as to avoid being put stock in this scenario.

Mark to market prior to the expiration the position will show gains as the stock moves closer to the long call strike and loses as it moves closer to the short call strike.

Rationale: this trade idea makes sense for those looking to play for a bounce-back over the next five weeks to the prior highs, but are willing to suffer losses if the stock is down 8.25% on Dec expiration.