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Is Alibaba’s Jack Ma Better Than Bezos?
An options play for those who missed the rally and those who are nervous about keeping their gains.
By Steven M. Sears
Sept. 18, 2017 9:39 p.m. ET
As shares of Alibaba Group Holding trade near their all-time high, investor sentiment is a mixture of excitement, regret, and trepidation.
Investors who missed the rally because they misread Alibaba’s (ticker: BABA) potential and risks are trying to decide if they should buy a stock that is up more than 100% so far this year.
Investors who own the stock, for their part, are excited about the gains but are worrying if expectations have grown unrealistic.
A simple solution is at hand for all situations: Alibaba’s November 175 dollars put option that was trading around 7 dollars when the stock was at 178.80 dollars.
The put’s implied volatility is around 30%, or roughly four times greater than that of the Standard & Poor’s 500 index. Alibaba’s volatility premium means the put is priced with a significant fear and greed premium, which is naturally attractive to sell.
Investors who think the stock is headed higher—and some stock analysts see Alibaba headed to 200 dollars over the next year—can sell the November 175 dollars put. The November expiration should capture Alibaba’s next earnings report.
This simple put sale effectively enables investors to get the options market to pay them for agreeing to buy the stock at 168 dollars. If the stock is not below the strike price at expiration, they can keep the money received for selling the put, and reset the trade and try again.
If the stock is below the strike at expiration, they get to buy the stock at a reduced price that reflects the sale of the put option. The risk to the trade is that Alibaba’s stock falls far below the put strike price, but that seems tempered by the company’s crisp execution and the growing realization among investors that Alibaba is one of the best ways to invest in China.
If the stock is above 180 dollars by the time you read this column, consider adjusting the strike price and selling the November 180 dollars put. The idea is to nestle a put just below the stock price.
Investors who want to lock in their gains on Alibaba’s stock can buy the November 175 dollars put and sell the November 165 dollars put. The put spread’s cost—3.35 dollars—will protect existing profits down to 165 dollars. If the stock is at 165 dollars at expiration, investors will make a tidy profit. The put spread’s maximum profit is 6.65 dollars.
Surprisingly, Alibaba’s options trading patterns are basically split between bullish calls and bearish puts. Extraordinary advances such as Alibaba’s rally often leave behind a directional bias in the options market. Investors usually rush to buy calls to ride the momentum, or they buy bearish puts to hedge gains. Instead, investors seem split about what comes next for the company.
A review of top expirations and strike prices shows investors are not mapping out future gains much beyond 185 dollars in October. This suggests that investors are unsure about Alibaba’s next move in the stock market. Investors should look beyond this potential risk, and focus on Alibaba’s potential, and the incredible vision of Jack Ma, the company’s founder and leader.
Alibaba is, as we have long said, a play on the rise of China’s middle class and all that involves. Alibaba runs the largest e-commerce website in the world’s second-largest economy and has strong franchises in finance, insurance, entertainment, logistics, and other businesses. In many ways, the company is like a combination of Amazon.com (AMZN), PayPal Holdings (PYPL), United Parcel Service (UPS), and Goldman Sachs Group (GS)—and even those comparisons probably understate the company’s potential.
As Michael Schwartz, Oppenheimer’s chief strategist, puts it, “Jack Ma is becoming a better Jeff Bezos than Jeff Bezos.”
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