Alibaba is an enormous Chinese e-commerce company that we are able to trade on the New York Stock Exchange. The way you can think about Alibaba is the following; it is a combination of Amazon and Walmart. It recently passed Walmart as the world’s largest retailer and now operations in over 190 countries.
Fortunately for us, Alibaba became a publically traded company in 2014 and is one of the most actively traded stocks in the world. The stock trades a lot of volume but since we are options traders we need to know if the BABA options are as good as the stock. Let’s give it a whirl and see if BABA options are good enough for us.
With Alibaba being one of the largest companies in the world and having a market cap of $257,000,000,000 (price of the stock times shares outstanding), it has become one of the most attractive stocks to trade for institutions and professional money managers.
But why does something like that attract the big money players?
These institutions and money managers have billions of dollars under management. They have to put that capital to use. They cannot put ten billion dollars to use in a stock that has a 2 billion dollar market cap now, can they?
So what does this lead to?
It leads to an average of almost ten million shares traded per day. If we take the current price of Alibaba ($102.80) and multiply that by the average share count (9,627,193) we get an average notional value exchanged on BABA stock of $989,675,440.40. That’s almost a billion dollars a day.
Fortunately for us, it is possible that BABA options could be just as good as the stock. Let’s see what they have to offer.
In order to see if Alibaba options are worth our time and money, we have to see if they have the proper liquidity for us. Let’s start with total volume. It passes the test if it is in the thousands:
Check. And because there is so much volume, there must be demand for multiple expiration cycles, right?
You got it. Again, the NYSE doesn’t just give weekly options to anyone who wants them. It costs them money to post these options and offer them to investors and traders. If there is not sufficient demand for these expirations they would not be there. But because of the sheer volume, the market makers know they need to provide these expirations and make everyone a winner.
Alibaba having all of these expirations cycles also makes it a huge tradable product come earnings season.
Expiration cycles check.
What about the bid/ask spreads? If they are any larger than a few pennies wide we will have to part ways with BABA options and move onto something else.
Absolutely. Again, small bid/ask spreads are a sign of more competition for orders. These options are liquid enough that market makers are confident then can quickly hedge their risk for filling any order size.
If institutions are involved we would see pretty sizeable open interest, which is the number of open options contracts at any strike price. How much do we see?
We see crazy amounts of open interest. Here is what I see when I look at this.
|Strike||Contracts||Share Equivalent||Notional Value|
Wow. On top of this, with Alibaba being only priced around $100 a share, there is no inability to make any type of option trade we want. The spread markets are tight and in a normal margin account, selling the $100 naked uncovered put would only cost $2,000 in buying power. This allows anyone to come to Alibaba’s options market to trade.
BABA Options are Amazing
Add it to the list.
- Incredible liquidity
- Plenty of expirations
- Tight bid/ask spreads
- Not too expensive of a stock
- Large institutional interest
If you are an options trader, you need to be trading BABA options…immediately.