Alibaba options set for strong demand on market debut

Fri Sep 26, 2014 1:17am EDT
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By Saqib Iqbal Ahmed

NEW YORK (Reuters) - The newest way to bet on the fortunes of Chinese e-commerce heavyweight Alibaba Group Holding Ltd (BABA.N: Quote) will debut on Monday when its stock options go live for trading, and investors should look for the initial action to be very busy, but also choppy and potentially pricey.

Options market traders say Alibaba puts and calls will likely see heavy demand given the interest shown so far in the stock since its record-setting $25 billion initial public offering last week.

First-day volume in the stock last Friday topped 270 million shares and has averaged around 40 million shares a day since, keeping it near the top of the New York Stock Exchange's most-active list each day.

"I would expect Alibaba's options to have a built-in demand, so to speak, as obviously all the people who want to get into the IPO at the beginning didn’t," said J.J. Kinahan, chief market strategist at retail brokerage TD Ameritrade Holding Corp.

U.S. options exchanges, including the Chicago Board Options Exchange, the C2 Options Exchange, ISE and ISE Gemini, are expected to list contracts on Alibaba on Sept. 29. Their debut will open the gates to a flood of speculators and hedgers to begin opening positions premised on where they think the stock will trade at various future dates.

Contract volume is expected to be among the more active of any name once the options are listed, said options strategist Fred Ruffy.

Still, it probably will not see quite the frenzy of interest shown in Facebook Inc (FB.O: Quote) options when they hit the market after the company's botched IPO in May 2012.

Brian Overby, senior options analyst at online brokerage TradeKing in Charlotte, North Carolina, sees Alibaba's first-day options volumes at about a quarter of Facebook's. The social media company's options volume set a record for a first day of trading with 365,000 contracts changing hands. Puts outnumbered calls by a ratio of 1.25:1 in its options debut on May 29, 2012.   Continued...

An employee is seen behind a glass wall with the logo of Alibaba at the company's headquarters on the outskirts of Hangzhou, Zhejiang province, April 23, 2014. REUTERS/Chance Chan