Jack Ma drums up business, and bulls follow suit

Options Action: Bulls bet on BABA
Options Action: Bulls bet on BABA   

Alibaba shares are down 6 percent in the last three weeks but some bulls are taking bets that it will see a rally in the coming month.

Though Alibaba dominates ecommerce in China, its stock has woefully underperformed that country's exuberant stock markets. The company's shares are down 15 percent year-to-date while the Shanghai Composite has soared 58 percent.

However, some traders are optimistic on Alibaba.

On Tuesday, as founder Jack Ma was in the U.S. pitching the site to businesses, bulls outnumbered bears in Alibaba's options by 2-to-1. One noteworthy bullish trade was a purchase of 1,200 contracts of the July 90-strike calls for a price of $1.65 each. Since each contract controls 100 shares, the trader is betting nearly $200,000 that Alibaba will close above $91.65 or 4.6 percent above Tuesday's close by mid-July.

A call is a bullish wager giving purchasers the right to buy a stock at set price within a given time frame.

Jack Ma
ChinaFotoPress | Getty Images
Jack Ma

According to Dan Nathan, co-founder of RiskReversal.com, the choice of a $90 price target was significant based on the stock's technicals. He notes that Alibaba shares came close to testing its 50-day moving average around $86 and says $90 will be an important level for it to break.

The choice of options to take on a bullish position in the stock could be based on the low price of Alibaba options, Nathan added. Implied volatility in the stock—in essence, its options' price—is now down to its lowest levels since options on Alibaba began trading in September.

It "is one way to do it to define your risks, especially for a stock that has been underperforming and is as volatile as Alibaba has been over the last few months," said Nathan.

He is also very positive on the stock's long-term prospects. "This company is going to be around for a very long time here," Nathan said. "This is going to be the Amazon for the next 10 years."

After going public in September, Alibaba's stock skyrocketed 75 percent over the course of two months. But investors quickly cooled on the name and it is now trading below its first trading day's lows.

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