Alibaba Stock Drops 11% After Earnings Miss: An Option Analysis

Alibaba Group Holdings BABA released earnings before the market open Thursday, missing across the board on EPS (-88%) and revenue (-1.6%).

Traders did not take too kindly to the earnings release, as the stock lost over 11% in the session. This is on heavy volume, with over 53 million shares traded today vs. the 10-day average of 18 million shares.

SEE ALSO: Why Alibaba Shares Are Falling Today

On top of the heavy trading today, option traders have been very active in the stock, trading over 741,000 contracts, with approximately 460,000 of them being calls and 281,000 being puts (image below).

Why It Matters: Missing on earnings isn't necessarily a reason in and of itself for the stock to drop so heavily. Yet Alibaba has already missed on earnings this year and is down over 38% year-to-date.

Combine that with such a strong earnings miss, and option traders have been aggressively trading the stock today.

Prior to Thursday, there were about 2.5 million calls and 1.9 million puts for a total of roughly 4.4 million options. Hence, the 742,000 contracts traded today represent a robust 16% increase in the total options.

Of those, approximately 62% were calls, however, the largest short dated calls by volume are for the $145 and $150 strikes, which are below the cash open price.

This suggests that while some of these were punters (retail traders trading cheap OTM calls in hopes of a quick gain), there's a good chance many of these calls were premium sellers (i.e. traders selling calls expecting the price to decline and thus make a quick profit from those calls losing value).

What's Next: The problem for Alibaba is there's not much material open interest or volume below the $140 strike through the Dec. 17 expiry (image below).

This suggests option traders aren't too interested in getting long below $140.

Hence, a weekly close below $140 could force option traders to re-adjust their downside levels as there isn't much option support until around the $105 strike.