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Aug. 4, 2020, 11:31 a.m. EDT

Analyzing Alibaba Group Holding's Unusual Options Activity

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By Benzinga.com

Alibaba Group Holding /zigman2/quotes/201948298/composite BABA -1.18% shares experienced unusual options activity on Tuesday. The stock price moved up to $260.71 following the option alert.

Extraordinarily large volume is one indication of unusual options activity. Volume refers to the total shares contracts traded in a day when discussing options activity. Unsettled contracts that have been traded, but not yet closed, are called open interest. These contracts are not closed because a buyer has not purchased a contract, or a seller has not sold it.

A contract with an expiration date in the distant future is another tell of unusual activity. Generally, additional time until a contract expires increases the potential for it to reach its strike price and grow its time value. Time value is important in this context because it represents the difference between the strike price and the value of the underlying asset.

Contracts that are “out of the money” are also indicative of unusual options activity. “Out of the money” contracts occur when the underlying price is under the strike price on a call option, or above the strike price on a put option. These trades are made with the expectation that the value of the underlying asset is going to change dramatically in the future, and buyers and sellers will benefit from a greater profit margin.

Options are “bullish” when a call is purchased at/near ask price or a put is sold at/near bid price. Options are “bearish” when a call is sold at/near bid price or a put is bought at/near ask price.

These observations are made without knowing the investor’s true intent by purchasing these options contracts. The activity is suggestive of these strategies, but an observer cannot be sure if a bettor is playing the contract outright or if the options bettor is hedging a large underlying position in common stock. For the latter case, bullish options activity may be less meaningful than the exposure a large investor has on their short position in common stock.

Unusual options activity is an advantageous strategy that may greatly reward an investor if they are highly skilled, but for the less experienced trader, it should remain as another tool to make an educated investment decision while taking other observations into account.

For more information to understand options alerts, visit https://pro.benzinga.help/en/articles/1769505-how-do-i-understand-options-alerts

© 2020 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.

/zigman2/quotes/201948298/composite
US : U.S.: NYSE
$ 269.73
-3.22 -1.18%
Volume: 9.56M
Sept. 24, 2020 4:00p
P/E Ratio
28.97
Dividend Yield
N/A
Market Cap
$745.70 billion
Rev. per Employee
$781,259
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