{"id":71157,"date":"2021-01-04T10:00:00","date_gmt":"2021-01-04T15:00:00","guid":{"rendered":"https:\/\/ibkrcampus.com\/?p=71157"},"modified":"2022-11-21T09:46:50","modified_gmt":"2022-11-21T14:46:50","slug":"alibaba-stock-is-under-fire-this-options-play-bets-it-will-recover","status":"publish","type":"post","link":"https:\/\/www.interactivebrokers.com\/campus\/traders-insight\/securities\/options\/alibaba-stock-is-under-fire-this-options-play-bets-it-will-recover\/","title":{"rendered":"Alibaba Stock Is Under Fire. This Options Play Bets It Will Recover."},"content":{"rendered":"\n

Of all the troubles in the world, be glad you don\u2019t have Jack Ma\u2019s woes to contend with.<\/p>\n\n\n\n

The billionaire founder of Alibaba Group Holding<\/a> (ticker: BABA) has angered one of the world\u2019s most powerful people, Xi Jinping, the leader of China. It is unclear how the story will end, or what ultimately happens to Alibaba.<\/p>\n\n\n\n

For whatever reason\u2014and there isn\u2019t any good one\u2014Ma gave a speech with critical comments<\/a> about China\u2019s financial regulations interfering with technological innovations. Xi quickly reminded China\u2019s richest man to be mindful of his place.<\/p>\n\n\n\n

Shortly thereafter, Xi reportedly blocked the initial public offering of Ant Financial Group<\/a>, of which Alibaba owns a third, and put Alibaba under antitrust review<\/a> for monopolistic business practices. Regulators are concerned that Ant is originating consumer loans and selling them to banks, without making financial accommodations to reflect risk. It has been suggested that Ant return to its origins as a payments network<\/a>.<\/p>\n\n\n\n

Alibaba has come under more intense scrutiny. The government is suddenly concerned that Alibaba, which owns many different but related companies, could be a monopoly.<\/p>\n\n\n\n

Investors are panicked. Since late October, Alibaba\u2019s stock has declined some 34%, dramatically underperforming Chinese stock proxies like the Xtrackers Harvest CSI 300 China A-Shares<\/a> exchange-traded fund (ASHR) and the iShares China Large-Cap<\/a> ETF (FXI). The selloff is one of the worst since Alibaba\u2019s September 2014 stock offering.<\/p>\n\n\n\n

One of the greatest fears most investors have about China is that the laws are unreliable. Nevertheless, Alibaba remains one of the most singular\u2014if now controversial\u2014ways to play the rise of China\u2019s middle class<\/a>, which is one of the world\u2019s most profound economic events.<\/p>\n\n\n\n

With Alibaba\u2019s stock around $238, investors can sell the January $230 put option for $5.25 and sell the January $260 call option for $1.75. This so-called short strangle\u2014that is, selling a put and call<\/a> with different strike prices but the same expiration\u2014pays investors for agreeing to buy Alibaba stock at an effective price of $223 (a $230 strike minus a $7 options premium) and to sell stock at an effective price of $267.<\/p>\n\n\n\n

During the past 52 weeks, Alibaba has ranged from $169.95 to $319.32. The stock is up about 12% in 2020.<\/strong><\/p>\n\n\n\n

The risk to selling a strangle is high. The stock could plummet far below the put strike price if regulators decide to dismantle the company and disenfranchise investors, for example. The stock could surge, too, but it\u2019s very difficult to characterize Alibaba\u2019s path as anything but uncertain.<\/p>\n\n\n\n

Alibaba\u2019s stock, once universally admired as evidence of China\u2019s technological and investment prowess, is trading under a cloud of unquantifiable uncertainty because Ma seemingly forgot his place in his country\u2019s power structure.<\/p>\n\n\n\n

If these regulatory reviews occurred anywhere but in China, investors would criticize Ma for speaking too freely and harming his business.<\/p>\n\n\n\n

But most Western investors are scared that China ultimately threatens America\u2019s global leadership. Alibaba has thus ceased\u2014temporarily or permanently\u2014to exist as an example of China\u2019s technological might and innovation. Alibaba now trades under a cloud of uncertainty because the Chinese Communist Party has unlimited power.<\/p>\n\n\n\n

Our suggested investment approach expresses a perhaps out-of-consensus view that Alibaba, to play off an old Chinese saying, isn\u2019t the proverbial chicken about to be killed to scare the monkey.<\/p>\n\n\n\n

Xi may discipline and humiliate Ma, but Xi is unlikely to seriously impede the flow of international money and domestic technology that Xi needs for China to continue its incredible economic rise.<\/p>\n\n\n\n

—<\/p>\n\n\n\n

Originally Posted on December 31, 2020 – Alibaba Stock Is Under Fire. This Options Play Bets It Will Recover.<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

Of all the troubles in the world, be glad you don\u2019t have Jack Ma\u2019s woes to contend with.<\/p>\n","protected":false},"author":31,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":"","jetpack_post_was_ever_published":false},"categories":[4,19,8,9,26,3],"tags":[1567],"contributors-categories":[13583],"class_list":["post-71157","post","type-post","status-publish","format-standard","category-asia","category-options","category-region","category-securities","category-text-articles","category-traders-insight","tag-alibaba","contributors-categories-barrons"],"pp_statuses_selecting_workflow":false,"pp_workflow_action":"current","pp_status_selection":"publish","acf":[],"yoast_head":"\nAlibaba Stock Is Under Fire. 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