There's a new way to trade Chinese online retail giant Alibaba. After its record initial public offering on Sept. 19, options on the stock debuted Monday for trading. And in a vigorous day of trading, the biggest traders were pursuing an interesting strategy: selling options in an effort to squeeze more money out of a likely stock position.
In one of the biggest deals of the day, an options trade sold 3,000 November 85-strike puts and sold 3,000 November 95-strike calls, for a total of $7.30. This trade, known as a "strangle," will allow the trader to keep that full $7.30 per share (or $2.19 million in total, since the trade was done 3,000 times, and each options contract controls 100 shares of stock) if Alibaba shares are between $85 and $95 at November expiration. In fact, this trade will not lead to losses unless Alibaba shares—which closed at $88.75 on Monday—rises above $102.30 or falls below $77.70.
"This is a yield-enhancement trade, likely against a long stock position," said Dan Nathan of RiskReversal.com. This trader "thinks that this stock is going to be range-bound over the next six weeks."
Indeed, after its busy IPO day, the stock has remained in a rather tight range. This means that selling options may be a better choice than buying options, considering that the stock may not be likely to move as much as options prices initially implied.
"You see a lot of sideways action, I think that's what this trader is thinking," Nathan said. "They're going to benefit from options prices coming in," which is "what you would expect out of a $200 billion company."
After all, Nathan points out that Facebook options have declined steadily in price since its also-massive IPO. It would make sense, then, for Alibaba options to do the same thing, he said.