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Alibaba Group Holding Ltd (BABA) Makes Available a New Game For Investors, But It Won’t Be Cheap To Play It

Starting with Monday, September 29, options on Alibaba Group Holding Ltd (NYSE:BABA)’s stock will be available for trade on the market. The company sold approximately 368 million shares, or almost 15% of the total number, enough for investors to play with. Implied volatility for the stock is high as the market has yet to discover the company properly to be able to assess the premium. This will lead to pricey puts and calls and wide bid/ask spreads, according to Reuters. 1

Alibaba Group Holding Ltd (NYSE:BABA)’s shares are traded for about $89.30 apiece, showing an increase of almost 0.5% during the day, but this value is still about 5.1% less than the spot at which the company went public. So far, predictions are quite modest in terms of exact values that the e-commerce’s price might take, making it practically impossible to hedge risks properly when trying to play with the stock.

In any case, everybody that wanted to expose itself to Alibaba Group Holding Ltd (NYSE:BABA)’s shares have another chance through contracts betting on specific future numbers. The same source brings up the example of Apple Inc. (NASDAQ:AAPL) securities, which expire in December, that cost $5.16 for calls and $4.65 for puts, considering the company’s actual price of $99.8 and an implied volatility of 23% for a range of 90 days.

Depending on how the market will calculate Alibaba Group Holding Ltd (NYSE:BABA)’s fluctuations in value, the above mentioned prices for options might get to double-digit values. Consider the next example provided by Reuters: Tripadvisor Inc (NASDAQ:TRIP), which trades at about $91.95 per share and has an implied volatility of about 40%, has its financial instruments priced at $10.60 for calls and $6.30 for puts.

The first adventurers into Alibaba Group Holding Ltd (NYSE:BABA)’s options must be precautious and stoic as imperfections in grasping information regarding the company’s actual price might produce undesirable results in many cases. In fact, according to Murphy’s Law, some will inevitably fall through.

Disclosure: none

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