May 2024 Portfolio Update (How to use options on Alibaba)

Anyone with Nvidia stock should look happier than this MaineCoon.

S&P500: 14.23% (was 9.3% last month)

Tracker: 13.91% (was 1.09%. Wow! 13% in one month)
STI: 5.35% (was 2.35%)

My portfolio: 23.09% (was 17.3%)

Notable Transactions

Increase in Cordlife after the announcement that application to set aside the interim injunction, so as to allow them to privately place some 51 million shares to some party, has failed. The total amount of Cordlife, alongside a rather generous uptick of 14+ percent so far, means 7% of my portfolio is now invested in Cordlife.

After the AGM, there are a few announcements, one that was published on 28-May-2024..

1) The interview and subsequently arrest of Ms. Chen Xiao Ling

At first, this might smell like bad news, but in reality, it is good because I believe the charges are the same as the rest of the ex-board members. My belief is that there is no financial fraud involved, and the board is only guilty of untimely disclosure. If so, that means all the board members at that time, of which Ms. Chen is a member, is guilty.

2) There are two potential group representation action against Cordlife. This is within expectations.

3) The company is further banned from collecting CBUs for another 3 months. I wouldn't be too anxious as the new board is barely days old, but this would be a matter of concern if things remain status quo 3 months on.

Other than this purchase of additional Cordlife shares, there are no other notable transactions.

My sold call options for Tracker Fund should be exercised, and I would receive a modest profit. This capital is now freed up where I could do options on perhaps Anta Sports or Alibaba. 

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What follows are some suggestions of which one could use options to express his/her opinion on 9988.HK. I am skewed towards a bullish stance-- I believe this latest convertible bond issue is not a major factor. 

1) Synthetics (Selling a put and buying a call with the premium)

If you are already ready to buy the stock outright, do a synthetic first.

As of writing, the share price of Alibaba is 79.5 HKD. 

I could sell a put option, at 80 strike, for about 6 HKD and then buy a call at the same strike price, for about 5 bucks. Why is there a discrepancy in the price? A put at 80 is slightly in the money, and the implied volatility for puts (36.93%) is higher than calls (29.77%) 

Take note that this is a 94 day option, which is a 3 months. 

If one were to outright buy a call option (without selling a put), he should seriously think of selling the call (to close the position) with about 1 month left before the strike. This is because theta (time value) decay is the fastest in the last month.

But with a synthetic, our mindset is that we are ready to buy the stock anyway.

So instead of spending money outright for 500 shares, we are getting exposure with no "downpayment" except for meeting our margins for the put options.

A leveraged synthetic is why we are VERY VERY BULLISH about a stock. We could sell IN THE MONEY puts (which will give us a higher premium) and then, based on how much risk you want to take, buy a call that is either:
a) Deep in the money: This means your delta is very close to 1, which means every dollar of up /down in the underlying will affect your option price by the same amount.

b) Far out of the money: lower probability of hitting the strike, but cheaper in option cost.

A leveraged synthetic is leveraged not because it is an option play. Options are leveraged instruments per se. It is call an leveraged synthetic because an ITM put has a delta very close to 1, and a deep in the money call has a delta of also close to 1. Adding the delta together would mean you have double the price movement relative to the stock.

2) A Bull Call Spread.

One could try to buy an 80 call, and then sell a call at 100, both at the same time to expiry.

This effectively means that we are happy with a 20 HKD profit per contract. The math looks like this: You buy a call for 4.94 HKD, and then you feel like the upside is NOT much, hence you are OKAY with limiting your profit to only 100 HKD.

Selling the 100 HKD call will give you a premium of about 0.90.

The net cost is about 4$ HKD.

An alternative to a buy a long dated call and sell a short dated call. This make sense if you are very bullish about the stock (i.e. you believe the stock does not go down).  If you sell a long dated call, the theta is actually lower than a short dated call, which means as a seller, a long dated call is less advantageous.

3) A Call Ratio Backspread.

This is a extremely peculiar bet. What you essentially is to sell a ITM call at X dollars and then buy 2 out of the money calls that would add up to X dollars. 

The belief is that there is tremendous downside (hence you selling a call), and you are fine with a higher break even price on the upside. Eventually, if the price does go up a lot more, the benefit of buying 2 out of the money calls (they become way in the money) outweigh the mark-to-market loss of selling a ITM call (which is now also in the money). 

It is this selling of the call and its associated mark-to-market losses, when the prices go up, that push up your break even price.

I think this is not the best strategy to use for Alibaba is there is a known "cap" to the upside of 105. 

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Unfortunately, my cost price for all my Alibaba stock is also about 101. Hence, I am somewhat "forced" to do something about my shares.