To The Moon

Alibaba will announce its earnings for fiscal Q2 2025 on Friday, November 15, before the U.S. market opens. The market expects Alibaba’s Q2 revenue to reach 240.037 billion yuan, representing a 6.78% year-over-year growth, with earnings per share (EPS) estimated at 11.07 yuan, a 2.76% increase year-over-year.

In response to the strong Chinese asset performance at the end of September and early October, Alibaba’s U.S.-listed stock briefly peaked at $117.82 before experiencing some volatility. For this quarter’s results, investors will focus on the performance of core businesses like e-commerce and cloud, as well as updates on Alibaba's share buyback program.

In early October, Alibaba announced on the Hong Kong Stock Exchange that it had repurchased a total of 414 million ordinary shares (equivalent to 52 million American Depositary Shares) at a cost of $4.1 billion in the first three quarters, as part of its authorized buyback program across both U.S. and Hong Kong markets. Under the board-approved buyback plan, Alibaba still has $22 billion in repurchase authorization available, which is valid through March 2027. However, with the recent rise in Alibaba’s share price amid the broader Chinese asset rally, the pace and frequency of repurchases have slowed, which investors may want to track in the earnings report.

Stock Price Performance in Earnings Seasons

Historically, Alibaba's stock tends to decline on earnings days. According to Market Chameleon, a review of Alibaba’s past 12 earnings quarters reveals a 58% probability of a share price drop on earnings day, with an average movement of ±5.7%, a maximum drop of -11.1%, and a maximum increase of +14.8%.

Currently, Alibaba’s implied stock price change is ±6.1%, suggesting that options markets are betting on a 6.1% post-earnings move, which is higher than Alibaba’s ±5.3% average move in the past four quarters, indicating a potential overvaluation of options.

Implied Volatility and Market Sentiment on Alibaba

Implied volatility skew shows that market sentiment is bullish on Alibaba, reflected in options prices.

What is a Strangle Strategy?

In a long strangle strategy, investors buy an out-of-the-money call option and an out-of-the-money put option. The call option’s strike price is above the asset’s current market price, while the put option’s strike price is below. This strategy offers significant profit potential because if the asset price rises, the call option has theoretically unlimited upside, and if it drops, the put option can yield gains. The risk is limited to the premium paid for both options.

Conversely, in a short strangle strategy, investors sell an out-of-the-money put and an out-of-the-money call option. This neutral strategy has limited profit potential. The maximum profit equals the premium collected from selling both options minus transaction costs, and it profits when the stock trades in a narrow range between the breakeven points.

Alibaba Short Strangle Example

Alibaba’s stock is currently trading at 90.1 HKD. Investors can implement a short strangle as follows:

• Sell a call option with a strike price of 97.5 HKD, earning a premium of 26 HKD.

  

  Sell a put option with a strike price of 85 HKD, earning a premium of 16 HKD.

  

Profit and Loss Analysis:

1. If the stock price exceeds 97.5 HKD (call option is exercised):

   • Assume stock price S>97.5S > 97.5S>97.5.

   • Loss from call option: (S−97.5)−26(S - 97.5) - 26(S−97.5)−26

   • The put option expires unexercised, generating a profit of 16 HKD.

2. If the stock price is between 85 HKD and 97.5 HKD (neither option is exercised):

   • No exercise obligation.

   • Total profit = 42 HKD (premium income only).

3. If the stock price is below 85 HKD (put option is exercised):

   • Assume stock price S<85S < 85S<85.

   • Loss from put option: (85−S)−16(85 - S) - 16(85−S)−16

   • The call option expires unexercised, generating a profit of 26 HKD.

Breakeven Points:

1. The upper breakeven point is when the stock price reaches 97.5+0.42=97.9297.5 + 0.42 = 97.9297.5+0.42=97.92 HKD.

2. The lower breakeven point is when the stock price falls to 85−0.42=84.5885 - 0.42 = 84.5885−0.42=84.58 HKD.

Thus, this strategy generates profit when the stock price remains between 84.58 HKD and 97.92 HKD, primarily relying on premium income.