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Alibaba options traders prepare for greater volatility

Alibaba Group shareholders should get ready for something they haven't much seen: volatility.

[NEW YORK] Alibaba Group shareholders should get ready for something they haven't much seen: volatility.

On Tuesday morning, the Chinese e-commerce heavyweight will deliver quarterly results, its first since its blockbuster IPO seven weeks ago, and options market pricing data is signaling a wilder-than-usual ride for the stock through the rest of the week.

Alibaba shares, which soared 38 per cent in their trading debut on Sept 19, have gained more than 8 per cent from their closing price on that day.

But daily moves have been largely subdued. At a time of overall market volatility, the shares' biggest gain has been 3.9 per cent, their biggest loss 4.3 per cent, but the average daily move has been just 0.3 per cent.

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On Monday, shares rose 4 per cent to touch a year-high of US$102.80, before paring gains to close up 3 per cent at US$101.29. Activity in the options market was also brisk with options volume at 349,000 contracts, making Monday the busiest day yet for the options.

Alibaba is expected to report a net profit of US$1.17 billion in the quarter ended September, according to a Thomson Reuters SmartEstimate poll of 21 analysts. Fully reported earnings are forecast at 36 US cents per share, based on a poll of 25 analysts. "We believe Alibaba's shares' post-earnings reaction mainly depends on management's commentary on top-line growth momentum and near-term margin trend," Henry Guo, senior analyst at JG Capital Global Investment Research, said in an email.

Alibaba is predicted to show revenue growth next year of nearly 36 per cent with a gross margin of nearly 72 per cent, according to Thomson Reuters StarMine.

The stock could make a run toward US$110 by week's end, or dive back below US$95, according to a popular options market trading strategy. That swing is calculated using the cost of a near-term Alibaba straddle, in which an investor buys an at-the-money put option and a similar call option, and it suggests a share move of 7 per cent in either direction by Friday.

Looking at Alibaba's trading history, such a move would be larger than usual, said Brian Overby, senior options analyst at online brokerage TradeKing in Charlotte, North Carolina.

The 30-day implied volatility on Alibaba, a gauge of the risk of large moves in a stock, has been creeping up. It was at 46.18 per cent on Monday, up from 36.29 per cent at the beginning of October.

Implied volatility tends to rise before corporate results as the options market factors in the increased risk of stock moves set off by unexpected numbers. In Alibaba's case, this is compounded by its limited trading history since its IPO.

With big IPOs' first earnings report there is a tendency for implied volatility to get a little bit inflated, Mr Overby said.