Sold BABA Naked Put

Options on Alibaba (BABA) started trading today and I decided to jump in while the volatility was still high and the option premiums are rich.  While BABA was trading at $89.04, I sold one BABA November $80 naked put for $1.76 and received $175.21 after paying $0.79 in commission.  I should’ve made my trade earlier in the morning when BABA was trading lower and the $80 strike put went for as much as $2.50, but I wanted to make sure the bottom wasn’t falling out.  It appears it was just normal volatility for the newborn stock.  As expected, BABA’s put premiums sank in the afternoon, even after prices retreated from where it was when I made my trade.

I expect BABA to bounce around for the next few months and then after it finds its footing, it should rally back above the closing price from its first day of trading at $93.43.  I’m not terribly confident in where it’ll find support since it has only seven days of trading history, including today, but don’t think it’s going to tank.  With that wobbly outlook, I wanted to go as far out-of-the-money as I could while still getting a decent annualized return.  At $80, the P/E Ratio would be close to 37.  That’s not cheap, but for a company that could provide massive growth in the next few years, it’s probably fairly reasonable.

The October strikes are too close and don’t provide enough premium for the risk.  December contracts are available and show a good premium, but when I can find an expiration under two months that matches my risk/reward criteria, I’ll almost always go with it rather than a longer dated expiration.  I was very tempted to aim for a higher strike and opted not to when I saw that I could earn better than 14% annualized while starting more than $9.00 away from the current price.

BABA Naked Put Risk/Reward Breakdown

• Potential profit: $175.21
• Potential return: 2.24%, 14.74% annualized
• Breakeven price: $78.25
• Downside protection: 12.12%
• Recent high: $93.43 was the closing high on the day BABA IPO’d, 9/19/14.  Taking the intraday high is pretty meaningless.
• Cushion from recent high: 16.25%
• Expected support:  This trade can easily be labeled a gamble because it’s too hard to have a realistic expectation of where it’ll find support.  Still, I made the trade so far out-of-the-money because I don’t think it’s going to fall below $80, at least not for more than a day.
• Position close goal/limit:  This is going to have to be a fluid position and my opinion might change a couple of times before November expiration.  I think the premiums will continue to fade quickly through October and I should be able to exit early for a large percentage of my gains.

Outside of my successfully placed trade on BABA, I placed a limit order to buy a put spread and sell a put spread on TLT when it was about 5 cents below its high of the day.  I was going for the weekly options that expire in four days, but my order didn’t hit as TLT slid for the next three hours.  I’ll try a similar order tomorrow and write it up if my trade goes through.  I think TLT is getting ahead of itself and should correct after it goes ex-dividend on Wednesday morning or after the jobs report on Friday.