Trader's million-dollar protection on Alibaba

Options Action: BABA protection play

Alibaba shares are up some 45 percent from their IPO price. And in a massive options trade ahead of earnings, one big Alibaba holder appears to be looking to protect those gains ahead of the event.

On Tuesday, against a purchase of 500,000 shares of stock, one trader bought 10,000 protective Alibaba "collars" for $1.00 per share. One constructs a collar by purchasing a downside put and selling an upside call. Against a long position, this type of trade allows a trader to get protection on the downside, in exchange for capping profits on the upside.

Specifically, in this massive Alibaba trade, the trader bought 10,000 Nov. 7 weekly 94-strike puts for $2.40 per share, and sold 10,000 November 110-strike calls for $1.40 per share. This means that by shelling out $1 million in premium, the trader has protection below $94 through Nov. 7, but misses out on profits on the stock above $110 through Nov. 22.