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Alibaba Group Holding Ltd (BABA): Investors Start Hedging Risk Through Options Ahead of November 4 Financials

Alibaba Group Holding Ltd (NYSE:BABA)’s stock price has been following a rollercoaster pattern for the past couple of days. The company’s up 4.72% for the past 5 days, and sells close to $99 after passing the $100 spot two days ago. The next wanderings of the value per share are deemed to be unknown as it is very difficult to infer anything without and fundamental information from the company.  Alibaba Group Holding Ltd (NYSE:BABA) will reveal its earnings in about 5 days, on November 4, and lots of investors pile up options contracts to tackle unpredictability, according to CNBC.

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“Today, options’ volume was 2 times average daily volume, but there was one really big trade. It was actually the largest trade that’s happened in Alibaba since options were listed in late September, where somebody did something called a collar and they bought it versus 5,000 shares of stock,” said Dan Nathan.

The intuition behind the play with Alibaba Group Holding Ltd (NYSE:BABA) contracts it’s fairly reasonable and simple.

“They basically sold a November regular expiration of $110 call at about $1.40 and they bought the November 7th weekly. Those expiration $94 puts and they paid about $2.40. So they paid about $1 for this structure. Really, what this does against a large stock position of 1 million shares, it basically creates a band, where the trader can actually participate to the upside to about $109 and then actually has protection below $94,” informed Dan Nathan.

So, this is not a sign that something is expected to go wrong with Alibaba Group Holding Ltd (NYSE:BABA). To give an analogical example, people don’t equip buildings with fire extinguishers because they expect a fire to consume the construction, rather they get prepared in case problems arise. Some investors, however, might be reluctant to pay high premium on options due to the increased volatility of the firm’s stock, but for many, Alibaba Group Holding Ltd (NYSE:BABA) is too big a deal to just let it go with the flow.

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