Is Alibaba in Trouble?

Published on
September 25th, 2019
7 minutes

Is Alibaba in Trouble?

Trade Ideas ·
Featuring Thomas Thornton

Published on: September 25th, 2019 • Duration: 7 minutes

Tom Thornton, founder of Hedge Fund Telemetry, returns to Real Vision to discuss his short thesis on Alibaba. In this interview with Jake Merl, Thornton highlights various technical and liquidity concerns for the stock, and suggests an options trade to take advantage of the current opportunity. Filmed on September 24, 2019.



  • RF
    Rick F.
    1 July 2020 @ 13:35
    Can we get this guy back to discuss this trade? Looking back it was a buy call for the longs.
  • DR
    David R.
    25 September 2019 @ 18:27
    Alibaba did have a listing in Hong Kong ages ago and shareholders were wiped out. Fraud rhymes and repeats I guess.
    • JC
      Jack C.
      28 September 2019 @ 06:28
      That was a different entity, which is their B2B business targeting exporters . This entity only makes up a small portion of overall revenue for Alibaba Group.
  • TT
    Tommy T. | Contributor
    27 September 2019 @ 20:49
    When going on Real Vision as a contributor, one has a responsibility to know there are people watching who have less experience, different risk tolerance, and time frames. I always try and give the easiest to understand trade with plenty of time to work. I also stressed on the video to take some profits when you get them. I took 25% of my trade off today with Ali Baba down 6% today. Thanks for watching!
    • PP
      Peter P.
      27 September 2019 @ 21:24
      Excellent timing ! Thanks for sharing the view
  • MT
    Mike T.
    25 September 2019 @ 10:15
    The following is not a commentary on Mr Thornton's bearish viewpoint on BABA, he will likely have better insights into BABA than I. What I would like to comment on is the structure of his option position. Mr Thornton's specific long put spread has a suboptimal probability of profit (PoP) of 33%. One benefit of using options there is mathematical framework available we can use in advance of placing a trade to know the math based percentage probability of profit. Once folks have a detailed mathematical understanding of how Options are priced, how the option market actually works, and that with an option position there are three factors at play 1./ Direction, 2./ Time decay, 3./ Volatility of prices then for Mr Thornton to suggest 'he sees potential for 5 times the PREMIUM paid is there is no mathematical basis to make such a claim. Of course the trade might work, but over time only placing Options trades with optimal mathematics, with optimal Probability of Profit will lead to greater P&L consistency. Mr Thorntons Trade: 130/160 long put spread in Feb cycle Probability of making at least $0.01 Profit at expiry = 33%. A big downside to this specific trade it has -'ve Theta of $1.889 loss per day i.e. time decay will work against it AND it has a suboptimal PoP of only 33%. A better way to place a long PUT spread but with positive Theta (i.e. time decay working in your favour) and a higher profit potential is buy an ITM Put and sell an OTM PUT. This ensures positive time decay AND a break-even above the stock price at time of position entry. Finding the correct ITM option with intrinsic value greater than the debit paid will give a positive Theta trade. Now probability of profit to make at least $0.01 is 54% an improvement of 21%. Downside of this approach? The debit paid will be over twice as much as Tommys but what we get in return is a greater chance of success i.e. a greater probability of profit and positive Theta time decay working in our favour. Looking at the prices in the option market for BABA at this moment in time I don't like either of the above approaches. For those that have a directional bearish in BABA a better overall approach with a much improved PoP: as the FEB ( I don’t like going that far out myself) cycle in BABA has an implied volatility of 33.9% (at time of writing) the premiums are therefore 'relatively' rich and therefore present an opportunity to SELL a Call ratio spread e.g. sell 2 x 185 Call and buy 1 x 190 Call has a probability of profit of 70% (over twice as better as Tommys) at time of writing. Unlike the above two trades where we have to pay a debit the above call ratio spread will be a SELL to open trade for a credit of $12.87 If we limit our expectation of profit to 50% of credit received and get out by BUYING back to close when the market price for the position falls to $9.68 the probability of profit jumps to 83% which I think compares rather well with Mr Thorntons 33% PoP. One additional extremely important benefit of selling options for credits (aka short premium) as opposed to debit trades, with the vast majority of short premium option strategies if/when the position starts to move against you, it will usually be possible to 'adjust' move strikes up, down, roll out in time and receive additional $ credits for doing so. The P&L viability of regularly adjusting such short premium (credit) positions is a relatively new phenomenon for retail option traders in last 5-7 years or so made possible by the dramatic fall in trading commissions if using the correct brokers e.g. $1 per contract to enter, $zero to close AND the introduction HFT Market Makers (e.g. Citadel) competing for order flow from Retail brokerages enhancing liquidity, closer spreads.
    • MT
      Mike T.
      25 September 2019 @ 10:36
      TYPO: with the call ratio spread, the 50% profit target is $6.43 not as originally stated $9.68
    • DZ
      Dongbin Z.
      25 September 2019 @ 17:42
      The 33% probability -- assuming you took it from your broker -- a) is assuming symmetric risk between up and down side & b) contains the usual inaccuracies in Black-Scholes model. In other words, if you read it down to the digit, it doesn't mean much. Your analysis on bear call spread is flawed -- and to be blunt, if I did not have the intention for a good discussion, I would not bother to point any flaws out in anyone's option structure. Bear call spread has a) limited gain in the event of large move *in* your favor, b) with the particular strike prices you refer to, has very low max gain to capital commitment ratio, c) if Feb expiry is what you are talking about, has a tiny delta and thus little to none or even negative leverage (negative as in <1) , d) the time decay is also tiny given the long expiry. Bottom line, the probability you get from your broker is far from enough to guide profitable trade -- although I don't mind you or anyone else following those at all.
    • MT
      Mike T.
      25 September 2019 @ 18:52
      Dongbin, sorry mate I don't think you're looking at this correctly. The bear call spread as you refer to is not not a simple spread terms of sell 1 buy 1, if it were you right in saying the -negative Delta would be very small e.g. -5 I'm suggesting use a RATIO spread sell 2 buy 1 with gives a much greater negative Delta of -55. Also the first focus of when loading up a option trade should NOT be the max profit possible for a 1 lot BUT the position should be best structured to give the desired probability of profit comes first, and then if a 1 lot doesn't give the desired max profit potential then you load up with multiple lots. Lastly I wouldn't personally use the FEB cycle for the trade, I would use November 15 Monthly with 51 days to go (note 45 days is the theoretical optimal as 45 is when Theta decay really starts to accerate) Over and out, best of luck
    • CO
      Craig O.
      26 September 2019 @ 00:58
      @Dongbin @Mike T. Love the exchange. Thank you both for engaging! Any recommendation for aspiring option apprentice about the best place to start learning the intricacies of option pricing and structuring positions (particularly defined risk credit spreads)?
    • MT
      Mike T.
      26 September 2019 @ 08:13
      FAO Dongbin: sorry but I do have one more thing for you. Check out a talk given by Tom Preston back in July on the Probability metrics available in TastyWorks brokerage platform. Tom is the guy that headed up development for Tastyworks and previous to that lead development for ThinkorSwim brokerage platform. Personally I'm of the view that for the specific task of Options trading is unsurpassed, a brilliant piece of software development. The downside of TW it's only possible to trade US Markets, which is not really a problem because when it comes to finding the most liquid options (liquidity absolutely essential) US markets are the only game in town. You can find Tom Prestons talk here If you still have questions on how TW calculates probabilities you can contact him at Lastly I'm perfectly comfortable being challenged at any time, because in the end if after debate we can achieve some level of agreement and understanding of other peoples experiences we all benefit.
    • MT
      Mike T.
      26 September 2019 @ 09:05
      FAO Craig O. Craig, you asked about learning credit spreads, try the following for a starters See also for much more, and its all free! online courses ….. I will confess to having Tastytrade on in the background, switching in and out depending on the subject every single day. They are live on air from 7am Central through until US Market close and all they talk about is trading options & futures with live money. There is one area of Tastytrade where I do make regular use of the 'mute' button during the first hour (7-8) when much of it is trivia. However when they get down to talking business the content is appropriate for all levels of people AND it's free. If like me your first impression doubts the authenticity e.g. of the people, is it staged, I'm not going to trust folks wearing funny hats or dressed differently to me, TastyTrade hold regular weekend educational events throughout the US where you can go meet the people in person and make your own judgement and it's all FREE! Craig, upfront if you're serious learning about options, be aware it will be a big effort to learn all the possible strategies. Initially it took me three months of all day, every day to get to a point of realisation of the potential opportunities available, what I had been missing out on, so I then went much deeper spending almost another year of immersing myself in the subject. Today, I'm coming towards the end of a self-imposed target of completing over two thousand very small trades using real money, not paper trading, the idea being to attain confidence that my approach is mathematically rigorous. Other than asking occastions questions by email, please note neither I, or any members of my family and friends have personal or professional relationships with anyone at TastyTrade or Tastyworks. I do not live in the US.
    • CO
      Craig O.
      27 September 2019 @ 03:55
      @Mike T. Thanks so much for taking the time to share your helpful insights. Over and above. Cheers.
  • MZ
    Matthew Z.
    25 September 2019 @ 16:54
    Here's a new title for you: Is Alibaba is a complete fraud?
    • GS
      Gordon S.
      25 September 2019 @ 19:36
      Still surprised that this blog seems to be unknown to most...