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."