Alibaba (BABA) Option Traders Uncertain Ahead of Earnings

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Alibaba (BABA) Option Traders Uncertain Ahead of Earnings

Ahead of the business’s impending results report, investors in Alibaba Group Holding Limited (BABA) have shown anxiety by buying down the share price of the company. At first glance, it seems as if option traders are anticipating a move down since the open interest contains a substantial proportion of sold call options. If BABA produces a favorable earnings surprise, the unusual option trading may produce a significant upward trend in the price movement.

The open interest for BABA’s call options is still expanding, and option premiums are now abnormally high. The trading activity suggests that traders have been hedging against a negative earnings report by purchasing options and selling calls. The share price of BABA may see unanticipated upward pressure as a consequence of these bets being unwound.

It may be difficult to predict with accuracy which way a stock will move after results. However, a comparison of option trading activity and the price movement of the stock reveals that, if Alibaba releases a favorable report, the stock price might increase dramatically, perhaps bringing it closer to the 20-day moving average in the days after the announcement. Because options are priced anticipating a negative move, this might occur. However, an unexpected earnings beat could take traders off guard and trigger a sharp increase in share price.

Key Takeaways

  • Ahead of the results report, investors and dealers have aggressively bought down Alibaba’s share price.
  • The closing share price has consistently fallen much below the 20-day moving average.
  • Pricing for calls and puts indicates a more forceful downward movement.
  • There is room for a greater move to the upside thanks to the volatility-based support and resistance levels.
  • This configuration gives traders the chance to benefit on unforeseen profits outcomes.

A literal wager on market probabilities is option trading. Chart watchers may learn a lot by analyzing the specifics of both stock price and option activity, but it also helps to understand the environment in which this price behavior occurred. The share price development for BABA as of Friday, July 30 is seen in the chart below. This established the framework for the earnings report.

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Current Trends

The shares of BABA stock have fallen to an extreme range over the last month due to intense investor concern about China’s crackdown on the country’s IT industry. It is interesting to note that throughout this time, the BABA share price fluctuated between about $230 in late June to around $180 in late July. The price ended up in the bottom portion of the chart’s lower zone as shown by the technical analyses.

The studies’ 20-day Keltner Channel indications serve as its foundation. These are price levels that are multiples of the stock’s average true range (ATR). This array makes it easier to see how the price changed over the course of a month, going from a high range to a lower range. The price movement of BABA shares suggests that market participants do not anticipate a favorable earnings outcome.

Tip

A common method for displaying historical volatility over time is the Average True Range (ATR). Two to four weeks of trade on a daily chart are often included in the 10 to 20 time periods that make up the standard average length of time utilized in its computation.

Chart watchers may see that traders and investors are expressing pessimism coming into earnings in this situation when BABA’s price trend has been sliding to an extreme range. BABA’s share price significantly decreased in the week before results, compared to its 20-day moving average. Because of this, it’s critical for chart observers to ascertain whether or not the change reflects investors’ predictions for poor profits.

Information regarding option trading may provide chart viewers more context for understanding investor expectations. Because there are more calls than puts in the open interest of options recently, calls are now preferred by option traders by a wide margin. An indication that traders are confident that BABA will rise following results is when there are more calls than puts. It should be noted, however, that even while implied volatility is down and call option volume is up, this often means that call options are being sold, which would indicate a pessimistic mood.

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Tip

A 20-day simple moving average, an upper and lower line, and a series of semi-parallel lines are shown by the Keltner Channel indicator. This channel indicator provides for a fantastic visualization tool for charting historical volatility since the higher lines are produced by adding a multiple of ATR to the average and the lower lines are drawn by subtracting a multiple of ATR from the average price.

Trading Activity

Option traders have priced their contracts as a wager that the stock will close between now and Friday, August 6, the day after the earnings report is revealed, within one of the two boxes shown on the chart. They are aware that BABA shares are in an extraordinary range. The price that call option sellers are providing is shown in the green-framed box. If prices increase, there is a 36% chance that Alibaba shares will settle inside this range at the end of the week. When put options were priced, the red box indicated a 33% chance that prices would decline after the announcement.

The fact that there were more than 2.3 million active call options in the open market as opposed to around 1.7 million put options highlights the bias that option purchasers had, since more than half of the transactions were for call options. This sum often indicates that dealers in call options anticipate a rise in price. Call options make up a bigger share of the overall volume, but they look to be sold since implied volatility is decreasing for call options while increasing for put options, as was previously noted. It implies a far more pessimistic future.

The 10-day Keltner Channel research with a four-times ATR setting produced the purple lines on the graph. With this metric, the price action is more likely to produce zones of strong support and resistance that are strongly connected. When the channel lines have recently made a considerable turn, these areas become visible.

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The graphic below includes annotations for the levels that the turns designate. What stands out about this chart is how closely the call and put prices are spread out, with more room for upward movement than downward movement. Even if calls are being traded above puts, this shows that option purchasers do not have a strong conviction about how the firm will report. Even when traders and investors might not anticipate it, a shocking announcement could cause prices to move sharply higher or down.

These levels of support and resistance demonstrate a wide range of price support and resistance. Therefore, it’s likely that any news—surprisingly good or bad—will take investors off guard and cause an out of the ordinary huge move. Following the last results report, BABA shares dropped 6.2% on the earnings day and then progressively increased the following week. After this news, investors could anticipate a similar price movement. Share prices might increase or decrease more than anticipated since there is lots of space in the volatility range.

Market Impact

As investors worry about China’s government clamping down on IT and private tutoring, China stocks have lately suffered. BABA’s profits, as one of the most valuable Chinese equities, may have an impact on other Chinese stocks.

No matter what the report says, equities in the consumer cyclical sector are expected to be significantly impacted. A favorable earnings surprise might boost shares of other companies in the industry, including Amazon.com, Inc. (AMZN) and eBay Inc. (EBAY).

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