BABA Options Market Flashes Caution as Shorts Keep Retreating

Options traders are sending the most bearish signal in a year on Alibaba, even as short sellers continue to cut positions at the fastest pace in a month.

Put Buying Hits a 52-Week Extreme

The put-call ratio closed at 0.6359 on October 19. That is 3.6 standard deviations above its 20-day mean of 0.56. The ratio has not been this elevated in 52 weeks. Earnings are due November 19, 30 days away. Pre-earnings put buying of this magnitude typically reflects either hedging demand or directional bets on a downside print.

The last two Alibaba earnings events are worth noting for context. The August 20 print saw the stock fall 7.4% on the day and 9.8% over the following five days. The September 22 event produced a 4.3% one-day drop and a 6.9% five-day decline. Options traders have a recent track record to point to.

Short Sellers Are Heading the Other Way

While put buyers are loading up, short sellers are doing the opposite. Short interest has fallen 13% over the past month, from around 41.1 million shares in mid-September to 36.5 million as of October 16. That is the steepest monthly reduction in the 30-day history of the data.

The borrow market is not signalling stress. Availability sits at 195%, meaning roughly two shares are available to borrow for every one already lent out. Cost to borrow is 0.55%, up around 10.5% on the week but still at a low absolute level. Nothing in the lending market is forcing the short covering.

JP Morgan lowered its price target on October 12 from $210 to $200, while maintaining its Overweight rating. Citigroup moved the other way on October 8, lifting its target from $190 to $193. The stock closed October 19 at $108.57, down 2% on the week and 4.1% on the month. The mean analyst target sits at $1,245, though that figure appears to reflect Hong Kong-listed share prices rather than the US ADR.

A Divergence Worth Watching

The positioning picture is split. Shorts are covering and the borrow market is relaxed. Yet options traders just pushed the put-call ratio to its highest point in a year, 30 days before results. BlackRock added 1.4 million shares as of September 30. Vanguard added 2.9 million over the same period. Hang Seng Investment Management added 2.7 million shares, also as of October 2.

The retail attention signal is pointing the other way: Wikipedia views put the attention z-score at -1.76 against the prior 90-day average, meaning retail interest in the stock is below its recent norm.

Data Summary

• Put-call ratio: 0.6359, z-score 3.6, 52-week high reading
• Short interest: 36.5M shares, down 13% over 30 days
• Availability: 195%, borrow market comfortable
• Cost to borrow: 0.55%, up 10.5% on the week, low level
• Stock price: $108.57, down 4.1% on the month
• Next earnings: November 19
• JP Morgan target cut: $210 to $200 (October 12, Overweight maintained)