On Monday stock options of Alibaba Group Holding Ltd will debut. Analysts expect for the to be strong *demand for puts and calls, particularly after the attention of the company’s IPO when it went public last week – in which it raised over $21 billion.
Demand refers to how many people want and will buy something, and at what volume – when demand is high, sales are very high.
Put options provide the right to sell stock at a price at a future date, while call options provide the right to buy stock at a price at a future debt.
Alibaba’s stock have been the most active in the New York Stock Exchange, with share volume of 270 million on its Friday debut and an average of 40 million everyday since.
Alibaba contracts will be available on September 29th on various U.S. options exchanges, including the Chicago Board Options Exchange, ISE, ISE Gemini, and the C2 Options Exchange.
As soon as they are available a surge of investors will flock to U.S. options exchanges and make positions on where they think the stock will be trading in future dates.
However, analysts don’t expect there to be quite as much activity compared to when Facebook options were available – a record 365,000 contracts were exchanged on its first day.
There will initially be wide bid-ask spreads on the option contracts until the market makers have some price discovery. With no historical stock price data, it is difficult to determine the implied volatility for each expiration date.
Implied volatility, a measure of big changes in the stock, is usually high for companies that have just gone public.
Investors should be wary on Sept 29th as the option’s asking price could be artificially inflated to more than the bidding price.
Ophir Gottlieb, chief executive officer at Los Angeles-based Capital Market Laboratories LLC., told Thomson Reuters:
“Amazon.com Inc trades with an implied volatility of 27 percent. I would expect Alibaba to trade above that level for some time.”