Trader bets on 35% drop for Alibaba shares

Options Action: Bad news for BABA?
Options Action: Bad news for BABA?   

Look out below!

Shares of Chinese e-commerce giant Alibaba surged more than 3 percent off its lows early Thursday as China's bruised stock market saw its biggest one-day rally since 2009. But on Wednesday, one trader bet the stock could fall as much as 35 percent by September.

Read MoreChinese equities underpin Asia's rebound

When the stock hit an all-time low and options-put volume ran four times its daily average, the trader purchased 12,000 of the September 50-strike puts for 15 cents each. Since buying a put is a bearish strategy that allows a trader to sell a stock at a given price at a set time, this trade is betting $180,000 that Alibaba shares will fall below $49.85 by September expiration.

"A lot of [Wednesday's] volume came in these way-out-of-the-money puts," options expert and CNBC contributor Dan Nathan said Wednesday on CNBC's "Fast Money." "The options market is implying that this trade basically has zero probability of being in the money."

Alibaba has fallen 33 percent from its high hit in November, and Nathan pointed out that the stock is sitting at key support near the $80 level.

"We know September is the one-year anniversary of the IPO and 1.4 billion shares are coming off lockup so maybe this is a trade hedging for a big move to the downside," said Nathan, founder of RiskReversal.com. The stock saw a 1 percent move higher during the last lock-up expiration on March 18, where 437 million shares were made available for sale.

But whether investors are bullish or bearish ahead of the massive expiration, Nathan stressed that buying puts this far out of the money is "not the right protection play if you are long Alibaba."

Contact Options Action

  • Showtimes

    Fridays, 5:30p ET
    Saturday, 6a ET
    Sunday, 6a ET
  • Melissa Lee

    Melissa Lee is the host of CNBC's “Fast Money” and “Options Action.”

Sponsored Related Links

More on thinkorswim by TD Ameritrade

  • Make sure you’re always keeping up with the market with up-to-the-minute news and breaking stories. Move on possible breakout stocks and options with potential opportunity. Plus, get in-depth analysis on futures and forex in one seamless, integrated experience. Join TD Ameritrade and trade commission-free for 60 days + get up to $600 cash.