(Image courtesy of thecountrycaller.com) The SEC has torpedoed Alibaba`s (BABA) stock with the accounting investigation initiated yesterday. The investigation aims to establish whether the company has violated any US securities laws pertaining to business combination accounting. In addition, Hong Kong is also investigating whether the company`s acquisition of CITIS 21cn in 2014 violated takeover rules. As a result, the stock has lost almost 7% over the last 48 hours: $BABA, Alibaba Group Holding Limited / 60 When these events take place stock options become extremely expensive in terms of implied volatility. As a result, some strategies, such as the iron condor, become very attractive: (Source: optionsprofitcalculator.com) If you sell a straddle, you can earn almost a 5% return in about a week. Of course, you do not want be exposed to very deep downward risk, so you have to hedge your straddle with a strangle. This is called an iron condor. The risk-return matrix for this trade is given below: (Source: optionsprofitcalculator.com) Note: the break-even price levels are $72.25 and $77.75 per share. Assuming that the market makers are pricing the iron condor with one standard deviation of daily returns, there is a ~68% chance that the stock will end up inside the break-even range. Hence, there is only a ~32% chance that the stock will end up higher or lower the implied range. As a result, this equals to a theoretical edge of $115 per options contract (recall that the minimum trade size is 100 options, which is one options contract). This results in an expected return of 1.5% over a matter of days (11 annualized) with relatively small risks! Alternatively, if you believe that the stock will move swiftly over the next few days, go ahead and buy a put butterfly (sell the wings and buy the "body"): (Source: optionsprofitcalculator.com) The risk-return profile is demonstrated below: (Source: optionsprofitcalculator.com) Agreed, the risk-return profile is not favorable to the buyers (a maximum loss of $175 per contract versus a maximum gain of $25 per contract). However, the probability of this strategy turning out profitably for the buyers is quite high. In fact, the stock only has to move about 2.5% in either direction over the next two trading sessions in order to deliver the maximum profit to the traders (you can also roll the strategy over, once you see the trend in the underlying in continuing). I find this pretty interesting. Which strategy would you choose? Do you have any alternative trades in mind?