Options Corner: A Rare Value Bet Tilts The Odds In Favor Of Alibaba Bears

Several tech giants cheered a surprise weekend decision from the White House which shielded key electronics from steep new tariffs on Chinese imports, most notably Alibaba Group Holding Ltd BABA.

Previously, Alibaba was on a decisive turnaround effort until aggressive rhetoric and positioning — ultimately culminating in sweeping new tariffs labeled Liberation Day — rattled sentiment.

Soon after the tariff announcement, President Donald Trump announced a 90-day pause on levies against certain countries that did not implement retaliatory measures. At the same time, the administration ramped up import taxes on China to a staggering 145%. Responding to the move, Beijing raised its own tariffs to 125% on Friday.

Therefore, the weekend decision represented a pleasant and, frankly, a welcome shift in tone. With more people worried about financial challenges escalating into an economic crisis, engaging in a full-blown trade war would hurt both nations. Thanks to cooler heads apparently prevailing, Alibaba’s stock shot higher.

Nevertheless, it's quite possible — perhaps even likely — that the market is overly bullish in anticipating a sustainable, long-term solution. For one thing, the concept of saving face is an integral component of Chinese business culture. Thus, Trump's lack of traditional diplomatic grace risks deepening the feud, not alleviating it. Second, the administration warned that the exemptions will be short-lived.

If so, it may be more reasonable to assume that while Alibaba’s stock can move higher from here, eventually, even this mini-rally may decelerate and correct.

Taking What the Market Will Give Alibaba Stock Put Spreads

From a longer-term bullish perspective, it's fairly clear that the optimists wish to drive BABA stock toward the $130 level, a position where the security established an upper baseline before trade war tensions derailed sentiment. However, to get to that point, Alibaba’s stock needs to rise above a multi-year resistance barrier around the $115 to $120 range.

Because the shielding of certain electronic products from ramped up tariffs is only temporary and with longstanding issues between the world's top two economies yet to be resolved, the recent boost in the tech space could be temporary.

Sweetening the pot is the statistical argument for Alibaba’s bear case. For any given two-week period, Alibaba features a neutral to slightly upward bias. In other words, if a hundred trades were placed on the equity, maybe 51 or 52 of them would rise by the next two weeks on a good streak.

In other words, such a transaction would be worth investigating if a bearish trade offers the equivalent of a value bet — some incentive that tilts a neutral trade into one that's in the bettor's favor.

The wild card is that Alibaba’s stock tends to be a momentum play. Whenever the equity gains between 5% and 10% over a one-week period (such as now), the probabilities shift in favor of the bulls. At the same time, the risks of the current geopolitical environment might not be fully baked in.

Spotlighting the Risk-Inverted Put Spread

For those who anticipate that the optimism in Alibaba will soon fade, the 120/117 bear put spread for the options chain expiring April 25 appears enticing. This transaction involves buying the $120 put (for a time-of-writing ask of $840) and simultaneously selling the $117 put (at bid of $640), resulting in a net debit paid of $200.

Should Alibaba share prices fall to or below the $117 short put strike price at expiration, the maximum reward is $100, or a clean payout of 50%. What stands out, of course, is that currently, the share price is below the target. Rather than theta (or time decay) working against the buyer, it now works for the buyer.

Essentially, the buyer enters the trade in a winning position on paper and is simply waiting for convergence to parity — the fancy term for collecting the debit spread's maximum payout. Typically, credit sellers do the waiting for convergence (although in their case, it's a convergence to zero). Thus, as circumstances stand now, the 120/117 bear put spread is effectively risk-inverted.

Finally, this trade is also compelling because as a baseline, the chances that Alibaba’s stock will rise 1.7% — roughly the gap between the short strike price and BABA's current market price — over a two-week period is only around 42%.

Effectively, what empirically is a neutral wager leans bearishly under the context of the aforementioned bear put spread. Even if you're not necessarily negative on Alibaba, the value bet Wall Street provides may be too tempting to ignore.

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