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Define The Risk If You Want To Stay Bullish On Alibaba Group Holding Ltd (BABA): Dan Nathan

Alibaba Group Holding Ltd (NYSE:BABA) had a very successful IPO not very long ago, and the share prices rose up significantly to $110 per share from then. Alibaba has given a lot of profits to investors in the last few weeks, when the share prices shot up from high $80 to $119 per share. Many investors hope that the trend will keep continuing into the New Year and remain bullish on Alibaba stock. Options Action Trader, Dan Nathan talked on CNBC about the possibility of options with Alibaba stock.

Alibaba jack ma BABA

Nathan pointed out that Alibaba Group Holding Ltd (NYSE:BABA) has traded pretty well since its IPO back in September. But he mentioned that there is a stock lock up coming in the next few quarters, which might introduce a lot of overhang into the Alibaba stock.

Nathan talked about an unlock of 8 million shares by Alibaba Group Holding Ltd (NYSE:BABA) in December, which is very small compared to a 368 million shares on the IPO day. But he thinks that the critical stock unlock is coming in March, during which 429 million shares will be unlocked. He thinks that there is going to be an overhang in March because of this substantial amount of stock unlock.

Nathan mentioned that Alibaba Group Holding Ltd (NYSE:BABA) stock is trading very well till now. He feels that many mutual funds like to hold on to Alibaba for many more days to come, which increases the demand for Alibaba stock. He thinks that the unlock that happens in March might neutralize the supply demand inequality. He pointed at a huge lock up of 1.8 billion shares in September 2015, so he thinks that there is potential for a sentiment shift for Alibaba Group Holding Ltd (NYSE:BABA) stock at some point in 2015.

Nathan summarized Alibaba’s stock behavior till date and said that they had a pretty good consolidation after its IPO and then came the big sentiment shift when the stock moved up to $119 per share and dropped off slowly to $110, which it is currently trading at. He added that many people liked the profits that Alibaba gave in first few months.

Alibaba Group Holding Ltd (NYSE:BABA) is a company with market cap of $257 billion and an implied volatility of 40%. Nathan thinks that it is pretty expensive. He feels that when an investor considers long term with Alibaba stock, it is better to consider the options despite the high prices of volatility, because he thinks that there is a potential for sentiment shift in 2015.

“[…] If you are having gains in this stock, and the thing is working, I get it, you don’t want to sell. But you may want to consider a stock replacement strategy or if you are bullish into the New Year, despite the overhang […]. Today when I looked at the stock at $111, and just to remember it did make to a high of $120 about a week and a half ago, you could look out to March, […] you could buy the $110, $150 calls, pay about $9.50, that’s your max loss there and when you thinks about it you have protection on the downside all the way to $100, but I think it is a pretty interesting near term […]. But you have potential gain from basically $119.50 […] all the way to $150, that’s about a $100 billion in market cap. […] that would make this a $375 billion market cap. […] But I guess I am not being skeptical, […] I think it makes sense to define you risk if your want to stay bullish on Alibaba,” Nathan said.

Disclosure: None

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