Alibaba options show investors wary ahead of lock-up expiration

By Saqib Iqbal Ahmed

NEW YORK (Reuters) - Alibaba Group Holding Ltd's blockbuster IPO has been followed by a steady slide in its stock price, which options market players do not expect to abate, with nearly a fifth of its shares to be released for trading on Wednesday.

The Chinese e-commerce giant's stock soared after it first went public in September, but the party didn't last. Trading just above $84 on Tuesday, the stock has dropped 29 percent from an all-time closing high of $119.15 in November on concerns about slowed growth in China and fake items on its website.

With an additional 437 million shares set to be freed in a post-IPO lockup, there has been an increase in bearish sentiment as investors hedge against more losses, with some even believing the shares will soon fall below the original IPO price of $68.

“It’s a subtle but important sign that investors are more fearful,” said Adam Sarhan, chief executive of Sarhan Capital in New York, who is short Alibaba shares.

Earlier this year, Chinese regulators sharply criticized the company for selling substandard, fake or banned products.

The 180-day post-IPO lock-up period bars various insiders from selling their shares. Of the 437 million shares to be sold publicly, about 100 million will remain subject to trading restrictions that apply to employees until after the company reports results in May.

Short interest in Alibaba's shares has risen to 57 million shares as of Feb. 27, up 30 percent since the beginning of the year, according to Thomson Reuters data.

Alibaba's options have been busy heading into the lock-up's expiration. In the last two weeks, puts betting on the stock dipping below $80 by Friday were the most actively traded. Deep out-of-the money puts, with their strike price well below the current share price and set to expire in April, have also seen an uptick in activity.

"A lot of people who are long the stock from the beginning want to try to let it run and they may be buying way out-of-the money puts against it [as a hedge] instead of putting a stop order on their stock," said J.J. Kinahan, chief strategist at TD Ameritrade.

Overall, open interest in Alibaba puts - usually used for bearish bets - has risen more quickly than open interest in calls this year, according to options analytics firm Trade Alert. The ratio of puts-to-calls is 0.75, about the highest it has been since the options were listed in September.

In recent months, there has been a sharp spike in open interest for strikes below the IPO price. For example, open interest in put options betting on Alibaba shares dipping below $65 by July 17 has increased to more than 8,500 from less than 1,000 contracts at the beginning of February.

(Reporting by Saqib Iqbal Ahmed; Editing by Dan Grebler)