A speculative long position in Alibaba using options if its new AI model is turning point

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A speculative long position in Alibaba using options if its new AI model is turning point

January 29 marked the Lunar New Year, China’s most important traditional holiday. The government-recognized holiday is a week long, although celebrations typically occur through the Lantern Festival, which falls on February 23 this year. It marks the beginning of the lunar calendar and is deeply rooted in ******** culture, history, and social life. Lunar New Year has been celebrated for over 4,000 years and is based on the traditional lunisolar calendar. Actions during the New Year are believed to set the tone for the year, and 2025 is the year of the snake. There are 12 zodiac animals in ******** astrology, and people born in the year of the snake are considered intelligent, strategic, and cunning deep thinkers. This is an interesting backdrop for the bombshells released by ******** AI company DeepSeek, which released its most recent R1 AI model slightly over a week ago, and Alibaba’s Qwen 2.5-Max this week. DeepSeek’s model’s performance impressed relative to the most well-known models from OpenAI’s ChatGPT. Alibaba (BABA) claims their model “outperforms…almost across the board GPT-4o, DeepSeek-V3 and Llama-3.1-405B”. The most stunning revelation — still to be examined — was that these results were achieved at development costs orders of magnitude smaller than the best-known U.S. models. Naturally, this threw the AI trade into a tailspin. On Monday, Nvidia’s market cap loss was the largest in history for a single company. Related trades like high-flying companies like Vistra Corp also plummeted as traders speculated that newer, more efficient AI models would reduce demand for the most expensive GPU and the electrical power needed to run them. Maybe. Maybe not. One thing is sure, though: many of the companies involved have seen a sharp spike in short-dated options premia, and the term structures are now in backwardation — meaning options with near-term expirations have “implied volatilities” higher than longer-dated ones. The trade Alibaba — this company’s valuation has been confounding. Forecast to grow revenues by more than 6% in the current fiscal year ending March 31 and greater than 8% next year, Alibaba is trading at just 11.5 times forward earnings, less than half as expensive as the S & P despite top and bottom line growth equal to or greater than that of the benchmark. And that’s after the 8.5% pop in the share price this year. BABA 1Y mountain Alibaba, 1 year ******** companies trade at material discounts, all else equal, to their Western counterparts as investors fret about challenging ******** demographics and a potentially capricious government. Still, this could be the catalyst that finally turns this stock around. I like it as a speculative long. The company reports earnings at the end of next week. I prefer purchasing longer-dated calls that capture next week’s earnings and the subsequent one, which is currently estimated to take place in mid-May. The trade : Sell BABA March 21 $85 put Buy BABA June 20 $100 call Sell BABA March 21 $110 call The stock has typically moved slightly over 10% on average, higher or lower, in the month following earnings, so to take advantage of the “vol crush” that we anticipate both as a function of earnings and the dust settling somewhat as investors absorb the AI model developments. DISCLOSURES: (None) All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, NBC UNIVERSAL, their parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium. THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.

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#speculative #long #position #Alibaba #options #model #turning #point

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