Traders bet on short-term Alibaba rally

Options Action: Bulls bet on BABA
Options 101: Time value
Options 101: Using a Call Spread

Alibaba shares have rallied for three days straight, and some traders are betting the stock will close the week even higher.

China's e-retail giant saw nearly 8 percent gains since Tuesday. They were further given a boost on Thursday after analysts at Bernstein initiated coverage on Alibaba with a "high-conviction outperform" rating and a price target of $120. The stock closed Thursday at $93.88 and some traders are betting it will move higher on Friday.

Specifically, some 20,000 of the weekly 95-strike calls were bought for 25 cents each. As each contract controls 100 shares, the traders wagering $500,000 that Alibaba will trade above $95.25 or 1.5 percent higher on Friday. A call is a bullish bet giving purchasers the right to buy a stock at a set price within a specific time frame.

The stock has stumbled since it traded at $120 in November. Alibaba's subsequent $590 million investment in a Chinese smartphone-maker did not quickly move the stock as many investors had hoped, according to options expert Mike Khouw.

"Everybody thought that Meizu acquisition back in February was going to be the propellant to take this stock higher," Khouw said.

Alibaba Group Executive Chairman Jack Ma
Pichi Chuang | Reuters

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But with Alibaba's stock now above its $93 IPO price, traders may have a bit more optimism to take on low-priced, short-term bets.

"We've seen other stocks like Netflix where these bets have really paid off," Khouw added.

Alibaba's $25 billion initial public offering was the largest in world history. Though the stock has returned to trading where it was back in September, it has fallen 10 percent year-to-date.

However, the analysts at Bernstein argue that the market is undervaluing Alibaba's potential upside.

"We think the Street … underestimates the full monetization potential of mobile GMV [gross merchandise volume] as Alibaba starts placing native ads, much like Facebook did with its Newsfeed," writes Carlos Kirjner and his team. They also see Wall Street as undervaluing the company's category growth and margin expansions.