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Alibaba Eludes Traders’ Grip With Half of Facebook Swings

News » Technology/Innovation

IMAGE: Alibaba Group Holding Ltd »


Alibaba Group Holding Ltd.’s smooth sailing since its initial public offering has been a bust for traders hoping to capitalize on volatility.

The average move in Alibaba’s stock over the week following its debut is 2.9 percent, half that of Facebook Inc. in the period after the social networking site went public in May 2012. Brokerages are charging rates to borrow shares, the first step in a short sale, that are about average for the U.S. market, a sign demand for bearish bets hasn’t surged.

With options trading set to begin today, Alibaba’s stock is behaving as if the company is a decade and a half old with an established history of earnings -- which it is. That’s disappointing news for anyone who was hoping to make money by anticipating big fluctuations in the share price.

“The Alibaba IPO was much better-handled and controlled,”Brian Overby, an options analyst for brokerage firm TradeKing LLC in Charlotte, North Carolina, said in a Sept. 24 phone interview. “That helps out and takes out volatility.” As for options, whose price is derived from equity volatility, “I don’t think demand will be there like it was in Facebook,” he said.

Facebook Trading

Facebook contracts were the most popular among the biggest initial public offerings in the decade preceding it as investors rushed to protect the shares from more losses. A total of 202,938 puts to sell the Menlo Park, California-based company and 162,482 calls to buy changed hands when the contracts started on May 29, 2012.

Alibaba options have strike prices between $75 and $100 in $5 increments, according to CBOE. The position limit is 250,000 contracts and the initial options expire in October, November, January and April.

The e-commerce company based in Hangzhou, China, raised $25 billion in its IPO on Sept. 18. Underwriters priced the stock at $68 and saw it surge 38 percent to $92.70 the next day. Alibaba shares slipped 3.7 percent to $90.46 last week.

Bob Christie, a spokesman for Alibaba, declined to comment amid Alibaba’s post-IPO quiet period.

Even with a high valuation versus peers, the interest rate for borrowing Alibaba stock has plunged. The cost to borrow shares, or indicative fee, was 0.5 percent on Sept. 26, down from an early cost of 8 percent, according to Markit, a London-based provider of financial information. The average borrow fee for members of the Standard & Poor’s 500 index is less than 0.5 percent.

‘Big Volume’

“You’re going to have big volume, but because the IPO was handled very well, you’re not going to have people coming in and shorting the stock left and right,” Overby said.

Options convey the right to buy or sell shares at a preset price and are used by traders to protect against declines or speculate on swings in an asset. Reasonable borrow rates may make short selling a better vehicle than options for bearish traders, said Peter Garnry at Saxo Bank A/S.

“Given the size and the attention Alibaba has been getting, it would probably be a liquid market in the long run, but it may take off slowly because it’s also easy to short it on the cash market,” Garnry, head of equity strategy at Saxo in Hellerup, Denmark, said in a Sept. 25 phone interview.

Alibaba bears have sold short 12.1 million shares, or about 3.3 percent of the company’s listed stock, according to data compiled by Bloomberg and Markit.

Alibaba’s Business

Alibaba provides marketplaces for buyers and sellers as well as services that help them conduct their businesses. Taobao Marketplace, started in 2003, enables millions of individuals and small businesses to sell products.

Leading up to the IPO, traders were using Yahoo! Inc. options as an Alibaba proxy, according to Bloomberg Tradebook LLC’s Greg Bender. Yahoo sold more than 120 million of its 524 million Alibaba shares in the IPO and now owns roughly 16 percent of Alibaba’s outstanding shares.

Alibaba trades at about 39 times the average of eight analyst estimates for the company’s adjusted earnings in 2015, according to data compiled by Bloomberg. That’s higher than some China-based tech peers: Internet service provider Tencent Holdings Ltd. is 27 times. Search engine Baidu Inc. trades at 25 times earnings.

Another attribute that may result in lower option price volatility is Alibaba’s track record of profitability, Bender said. It’s been in existence for more than 15 years and has generated $9.4 billion in revenueover the past 12 months, Bloomberg data show.

“While it may be tempting to start drawing parallels” to Facebook, “there is not a lot in common,” Bender, a derivatives execution consultant for Bloomberg Tradebook, wrote in a Sept. 24 note to clients. “Alibaba is a relatively mature company.”

Article Credit: Bloomberg

Updated 3 Years ago

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Tags:     Alibaba Group Holding Ltd     TradeKing LLC     Menlo Park     Bob Christie     Peter Garnry