Alibaba Options Open For Trade

On Monday, Alibaba Group Holding Ltd BABA options opened for trading.

Alibaba options opened with eight different expiration cycles ranging from October 2014 to January 2017.

Within the expiration cycles, the at the money options are trading with $2.50 wide strikes, whereas further out of the money strikes are $5.00 wide. Consequently, option spreads will be $2.50 wide minimum.

The larger width in strikes can be disadvantage for individuals with smaller account sizes as $250 is the minimum capital required to place a spread. Compared to other products such as SPY, FB, TWTR, and MSFT which offer dollar and $0.50 wide strike selections.

Most importantly, liquidity in Alibaba options appears to be sufficient; halfway through the trading session there is already thousands of contracts traded on the at the money options.

On the other hand, the bid/ask spread in Alibaba options is slightly wide ranging from $0.05 to $0.30. It should be noted that the bid/ask spread in Alibaba will be no less than $0.05 for the following nine months as it will not qualify for the penny increment options program until then.

Investors must consider the width in bid/ask spread when trading Alibaba options. Given that Alibaba has $0.05 wide spreads investors will be giving up considerably more money to the market makers compared to trading a product with $0.01 wide spreads.

October options opened trading with roughly 45 percent implied volatility. Since the open, volatility has already contracted three percent; suggesting a $4 move in the next 18 days.

Many option traders found the opening option volatility in Alibaba is low and predicted it to open closer to 70%. As a result, market makers in the name are suggesting there is less expected price movement than previously anticipated.

In comparison, when Facebook initially listed options; implied volatility was priced at 67 percent, and Twitter’s initial volatility was priced at 55 percent; offering premium sellers a larger break even window.

Currently, shares of Alibaba are trading at $88.80 down 1.8 percent with over 59,000 option contracts traded on 17 million shares traded.