429M Share Insider Lockup Expiration Caps Alibaba Group Holding Ltd Shares

429M Share Insider Lockup Expiration Caps Alibaba Group Holding Ltd Shares
By Charliepug (Own work) [CC BY-SA 4.0], via Wikimedia Commons

Chinese e-tailer Alibaba has been a Wall Street darling and a high flyer ever since it’s IPO, hitting a high of $120 a share back in November of last year, but it has run into a brick wall recently, dropping from $105 in the last week of January to under $82 today. A number of analysts have commented that the sell off in Alibaba is at least partly related to overhang from the 429 million insider shares unlocking on March 18th.

Some traders think there’s more room on the downside for Alibaba

Last Wednesday Alibaba options volume was 250% above normal, and one trader made a large bet that the stock will drop at least 13% in the next two weeks. The trader purchased 3,500 of the March $74 puts for 25 cents each. A put allows one to sell a stock at a given price at a given time, he or she will only make profits if Alibaba shares fall below $73.75 by the expiration date of March 20. That would be the lowest level for Alibaba shares since the IPO almost six months ago. Some options pros commented that this trade was likely a continuation of a bet against Alibaba.

Northern Pipe Line Wasn't Graham's Only Activist Situation

Valuewalk, Ben Graham, Benjamin Graham, writing, reading, books, The Intelligent Investor, Value investing, value investors, Berkshire Hathaway, Warren Buffett, investor psychology, minimal debt, buy-and-hold investing, fundamental analysis, concentrated diversification, margin of safety, activist investing, contrarian mindsetsWe wrote about Ben Graham's activism at northern pipe line, but there are other interesting stories involving the father of value investing Value investing and activism go hand-in-hand. Benjamin Graham, the godfather of value investing, discovered how important it is to incorporate activism into a value strategy relatively early in his career, a strategy that Read More

That said, despite the price drop and the options buying, the cost of buying “insurance” on Alibaba remains relatively low. Implied volatility (the cost of options relative to time to expiration) has not moved up significantly.

Statement from analyst Dan Nathan

“You have to think that all of this action has to do with this impending lockup expiration of 429 million shares on March 18,” notes Dan Nathan, founder and editor of RiskReversal.com. “Those are far out-of-the-money puts that have a small chance of paying off,” Nathan continued.

He points out the timing and size of these and other put purchases makes clear the amount of investor skittishness surrounding the lockup expiration.

“It really gives you a sense of what traders are thinking ahead of the expiration,” Nathan commented.

Second Alibaba insider lockup expiration in September

Potential Alibaba investors should also keep in mind that another 1.6 billion insider shares will become available for sale in September as the final insider lockup related to last year’s IPO expires.

No posts to display