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 Options market traders say Alibaba puts and calls will likely see
heavy demand given the interest shown so far in the stock since its
record-setting $25 billion initial public offering last week.
First-day volume in the stock last Friday topped 270 million shares
and has averaged around 40 million shares a day since, keeping it
near the top of the New York Stock Exchange's most-active list each
day.
"I would expect Alibaba's options to have a built-in demand, so to
speak, as obviously all the people who want to get into the IPO at
the beginning didn’t," said J.J. Kinahan, chief market strategist at
retail brokerage TD Ameritrade Holding Corp.
U.S. options exchanges, including the Chicago Board Options
Exchange, the C2 Options Exchange, ISE and ISE Gemini, are expected
to list contracts on Alibaba on Sept. 29. Their debut will open the
gates to a flood of speculators and hedgers to begin opening
positions premised on where they think the stock will trade at
various future dates.
Contract volume is expected to be among the more active of any name
once the options are listed, said WhatsTrading.com options
strategist Fred Ruffy.
Still, it probably will not see quite the frenzy of interest shown
in Facebook Inc <FB.O> options when they hit the market after the
company's botched IPO in May 2012.
Brian Overby, senior options analyst at online brokerage TradeKing
in Charlotte, North Carolina, sees Alibaba's first-day options
volumes at about a quarter of Facebook's. The social media company's
options volume set a record for a first day of trading with 365,000
contracts changing hands. Puts outnumbered calls by a ratio of
1.25:1 in its options debut on May 29, 2012.
Puts convey the right to sell the stock at a set price at a future
date, while calls provide the right to buy it at a certain price at
a date down the road.
VOLATILITY IS THE KEY
Trading Alibaba options will be tricky at the beginning, Overby
said.
Option prices, called premiums, trade at a fraction of the
underlying stock's price. But given the stock is still trading
around $90 and daily price swings are wide, Alibaba's options are
not likely to be super cheap.
Moreover, making the initial determinations for what those levels
should be across potentially dozens of strike prices and contract
expiration dates could be dicey.
"At the start there will most likely be wide bid/ask spreads on the
option contracts until the market makers have some price discovery,"
Overby said.
Implied volatility, a measure of the risk that big moves in the
stock pose and a key component in setting options prices, is
typically high for companies immediately after their IPO.
"Amazon.com Inc trades with an implied volatility of 27 percent. I
would expect Alibaba to trade above that level for some time," said
Ophir Gottlieb, chief executive officer at Los Angeles-based Capital
Market Laboratories LLC.
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Looking at other stocks in Alibaba's price range offers some clues
about just how widely its options prices may vary.
For instance, at-the-money options expiring in December on Apple
Inc, currently around $98 and with a 90-day implied volatility of
around 23 percent, last traded at $5.16 for calls and $4.65 for
puts.
But the December at-the-money options for TripAdvisor Inc, trading
around $91.50 with an implied volatility nearing 40 percent, last
crossed at $10.60 for calls and $6.30 for puts.
NEW PLATFORM FOR SHORTS
The start of options trading also will give short sellers an
additional venue for betting on a drop in the stock. Alibaba's share
price has now retreated around 5 percent after a first-day gain of
about 38 percent.
If the shares are difficult to borrow to sell short given it is
still so soon after the IPO, that could drive more shorts into
Alibaba options as an alternative and this could put downward
pressure on the stock, said Henry Schwartz, president at options
analytics firm Trade Alert.
The cost to borrow Alibaba shares has varied widely in the days
since the IPO.
On Thursday, for instance, annual borrowing costs started the day in
the 25 percent region, but plunged soon afterward, now registering
just 0.2 percent, according to Karl Loomes, market analyst at
SunGard’s Astec Analytics. That is about the same as to borrow IBM
or Ford Motor Co <F.N> shares.
The cost to borrow the average stock for shorting typically is
negligible unless the stock is listed as hard to borrow.
"Though this is fairly low for the first days of securities lending
following such a highly publicized IPO, it is probably mostly on the
back of such high availability of stock to borrow rather than
signifying a lack of demand," Loomes said.
Some 368 million shares were sold in the IPO, following the exercise
of over-allotment options by the deal's underwriters.
(Editing by Dan Burns and Matthew Lewis)
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