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Don’t get lost in Alibaba excitement

Get out your superlatives. The Alibaba IPO is anticipated to be the biggest initial public offering (IPO) in history – with an expected $20 billion offering.

The numbers are staggering. The Chinese e-commerce giant could be valued at $163 billion, not too far Facebook's $200 billion valuation. Its profit margins are above 40 percent and Alibaba accounts for 80 percent of the fast growing Chinese e-commerce market.

Don't get lost in the excitement. The timing of this huge IPO is risky.


An employee walks past the Alibaba logo at the company’s headquarters outside of Hangzhou, China.
Carlos Barria | Reuters
An employee walks past the Alibaba logo at the company’s headquarters outside of Hangzhou, China.

The Alibaba IPO comes amid a lull in an otherwise strong year for IPOs. Will this mega offering fuel the IPO market even further or will it signal mega IPO fatigue?

Jackie Kelley, Global IPO Markets Leader at EY told CNBC: " We have been a little soft, but it's typical for the summer, it's simply pausing for breath."

Others agree IPO activity will continue to thrive.

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According to an estimate by Renaissance Capital, the total amount raised in IPOs in the U.S. this year could reach $80 billion from currently $40 billion raised in the U.S. , which would be the highest level since 2000, and almost 50 percent more than in 2013.

And there is still money to be made in IPOs, says EY.

"IPOs typically outperform market, 5-10 percent ahead of our leading indices. Strong fundamentals are definitely driving IPO market activity and great returns for investors."

According to Renaissance Capital, mega IPOs saw a day 1 pop of 11.4 percent and are trading below the IPO price a year later.

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Mark Yusko, CIO of Morgan Creek Capital Management, is already an investor in Alibaba - having bought tranches in the private market in 2011, 13 and 14 – and continues to be bullish on the stock.

"We think they have a great management team and that this is a real, legitimate and thriving businesses," he said, which is why he wants to capture the IPO pop.

So what's the best trade to put on around the Alibaba IPO – if you cannot get your hands on the highly coveted IPO shares?

The best way is to hold Yahoo and Softbank. Yahoo owns a 22.5 percent stake in Alibaba. Softbank holds a 37 percent stake.

Read MoreWhat Alibaba learned from Facebook's IPO flop

Peter Garnry, Head of Equity Strategy at Saxo Bank highlights: "Yahoo as a good opportunity for a covered call strategy for those investors that are long Yahoo. The October call with a strike at $42 has a potential annualized static return of 30%."

According to Garnry, the Alibaba IPO will be a driver of Yahoo shares for two reasons: " Firstly, Yahoo's stake in Alibaba is worth more than Yahoo's market value which means that the IPO is the primary driver of Yahoo's share price."

Secondly, Garnry expects the "sheer size of the IPO will make the Street buzz and the strong sentiment will be positive for Yahoo."

Despite all this optimism, some wonder whether this IPO is one giant alarm bell for the market. History should have taught us that bigger isn't always better and there may be a risk this monster IPO will cool an already softening IPO market.

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