bidu #1 CHRIS TYLER First, premiums in both December and January

Options In Focus: Baidu
By CHRIS TYLER, Optionetics.com Analyst
Posted 12/14/2010 05:19 PM ET


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BIDU * Baidu Inc Ads
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DANG E-Comm Cn Dangdang A Ads YOKU Youku.Com Inc Cl A Ads * Top-Rated Company Investors have been hearing a lot of chatter over the past week along the lines of “It’s China’s Amazon.com” or “It’s the YouTube of China!” as names like E-Commerce China Dang Dang (DANG) and Youku.com (YOKU) came public to much fanfare. That said one company out of China that’s already built up more than a whole lot of hype and has those other important options to help construct a stronger position with; is China-based Internet search outfit Baidu (BIDU).

Shares of BIDU were off by a bit more than 1% with a couple hours remaining Tuesday. While there appears to be no real news to speak of, investors were busy testing Baidu’s 50-day simple moving average support for a third time within its eight-week flat base. With shares up somewhere in the vicinity of 900% since its December 2008 — January 2009 lows and nary a reset of multiple base counts—maybe that’s news worthy of profit-taking in of itself?

For their part, option traders appear to be acting a bit more “ho ho hopeful” than investors in the stock. While at times the two are inseparable, Baidu’s put/call ratio of 0.46 does show call trading is favored by a margin of more than two-to-one and below its already bullish average reading near 0.70.

Also deserved of consideration are two items that sometimes get lost or dismissed in taking the pulse of option paper. First, premiums in both December and January are at trading range lows of the past couple months. Secondly, implieds in the mid to high 30s are priced only modestly above fair value relative to the share’s 20 and 90-day statistical volatility. Combined and while not exactly out-of-the ordinary for today’s market conditions, the pricing is thought important in conjunction with the call trading bias.

In this strategist’s view it suggests two way order flow but with a clear and somewhat cavalier attitude towards downside risk. While both trading months will be off the board prior to earnings and what amounts to a potentially large catalyst for shares, I can’t say I’m enthusiastic about others ennui and obvious expectations for further upside and much lesser regard for that sometimes harder-to-handle brand of profit-taking.