Options players have shown an increased appetite lately for
bearish bets on Baidu, Inc. (BIDU - 141.84), according to data from
the International Securities Exchange (ISE), Chicago Board Options
), and NASDAQ OMX PHLX (PHLX). During the past 10 sessions, BIDU
has racked up an ISE/CBOE/PHLX put/call volume ratio of 0.62, which
ranks higher than 70% of other such readings taken during the past
year. In other words, speculators have purchased puts over calls at
a faster pace just 30% of the time.
However, on Monday, one trader used call options to bet on
lackluster price action for BIDU. Specifically, the speculator
constructed a short call spread, or credit spread, by selling 355
contracts of the weekly 150-strike call, and simultaneously
purchasing an equivalent number of weekly 155-strike calls.
Essentially, this trader is looking for BIDU to remain pinned at or
below $150 through the end of this week, when these weekly options
The neutral-to-bearish spread was opened for an initial net
credit of $0.22, or $22 per contract, which is the speculator's
maximum potential profit on the play (less any brokerage fees). The
trader may retain this entire amount if BIDU closes anywhere at or
below $150 at the end of Friday's session, while all of the
contracts involved could be left to expire worthless.
Even if BIDU bolts higher over the next several sessions, the
purchase of the higher-strike call works to limit the spread
player's risk. No matter how high the stock should rise, the
trader's maximum potential loss is limited to the difference
between the two strikes, less the initial net credit -- in this
Checking out the charts, it's not too hard to see why Monday's
spread speculator is betting on a period of short-term stagnation
south of $150. BIDU has blazed an impressive path higher, with the
stock more than doubling in value over the past 52 weeks. The stock
is still trading comfortably north of support at its 10-week and
20-week moving averages, which have underlined BIDU's ascent for
more than two years.
However, the round-number $150 region hasn't yet been surmounted
on a weekly closing basis, despite several challenges of this area.
It's reasonable to assume that this looming technical level could
continue to cap BIDU's progress, at least through the end of the
The spring 2011 issue of
magazine is now available here.
All Rights Reserved. Unauthorized reproduction of any SIR publication is strictly prohibited.