Options Action
Friday 5:30 PM ET, Saturday & Sunday 6:00 AM ET
Options Action

How to make a lot more money on Alibaba

Options Action: Biggest Alibaba options trade
Options Action: Biggest Alibaba options trade

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."

Read MoreUnder arrest (sort of): Yahoo locks up Alibaba, but stock slides

Trader on the floor of the New York Stock Exchange during the Alibaba Group IPO opening.
Adam Jeffery | CNBC

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.

Read MoreIPOs resurface in the long shadow of Alibaba

"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.