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Alibaba expiration has traders betting on new lows

Options Action: BABA bears

If you missed out on the Alibaba initial public offering, fear not. You'll soon be able to buy new shares of the company—a lot of them.

That's because company insiders will soon be able to sell 429 million new shares the Chinese Internet giant released to the public on March 18 as part of a lockup expiration. And that deluge of new stock has some investors running to make bearish bets in the options market.

On Wednesday, when Alibaba options volume ran 2½ times its average daily, one trader made a large bet that the stock would fall 13 percent in the next two weeks. Specifically, the trader (or institution) bought 3,500 of the March 74-strike puts for 25 cents each. Since buying a put allows one to sell a stock at a given price at a given time, the trade is profitable if Alibaba shares fall below $73.75 by March 20, or its lowest level since the Sept. 19 IPO. Options traders said they believed this trade was continuation of an existing bearish bet.

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"You have to think that all of this action has to do with this impending lockup expiration of 429 million shares on March 18," said Dan Nathan, founder and editor of RiskReversal.com. "Those are far out-of-the-money puts that have a small chance of paying off," added Nathan, a CNBC contributor. Out-of-the-money options often expire worthless and are considered a risky bet.

According to Nathan, the nature of these particular put purchases indicates a great deal of investor skittishness surrounding the lockup.

"It really gives you a sense of what traders are thinking ahead of the expiration," said Nathan.

Alibaba Group signage at the New York Stock Exchange during IPO, September 19, 2014.
Adam Jeffery | CNBC

Company officers and investors in newly created public companies often agree not to sell shares before a certain date following an IPO. These so-called lockup periods are designed to protect investors who are early buyers in the stock in the secondary market. The March expiration comes six months before an even larger one for Alibaba shareholders. In September, 1.6 billion shares will become available for sale.

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It's been a tough go of late for the Chinese Internet retailer. After an initial surge, shares of the company are down nearly 20 percent this year while the is up 5 percent over that time. The company's stock hit an all-time high of $120 per share in November.

Still, despite the volatility, the cost of buying insurance on Alibaba stock remains muted. Implied volatility, or the cost of options, remains relatively low.

Said Nathan: "If you want to make a directional bet into this event, that's the way to do it."