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Baidu Inc (ADR) (BIDU) Dip Draws Option Bears

Baidu Inc (ADR) options players are buying July-dated puts today

by 5/13/2014 1:38 PM
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Baidu Inc (ADR) (NASDAQ:BIDU) is down 2.4% at $156 this afternoon, falling in tandem with most Chinese Internet names. The stock is now 12.3% lower year-to-date, and options traders today are either wagering on or hedging against a steeper decline for the shares.

While most of Friday's action centered on a neutral-to-bullish credit spread, speculators today are taking the road more traveled. The stock's deep out-of-the-money July 125 put is most active thus far, with nearly 1,900 contracts exchanged. Almost all of the puts traded on the ask side, volume has surpassed open interest at the strike, and the International Securities Exchange (ISE) confirms that a healthy portion of the puts were bought to open.

Assuming the buyers are "vanilla" option bears, their goal is for BIDU to be sitting south of breakeven at $123.92 (strike minus volume-weighted average price of $1.08) -- in territory not explored since July -- at the close on Friday, July 18, when the options expire. Delta on the put sits at negative 0.09, implying a less than 10% chance of expiring in the money.

On the other hand, the buyers could be BIDU shareholders looking for some intermediate-term insurance. By purchasing the protective puts, the speculators guarantee the least they'll receive for their BIDU shares is $125 apiece, should the security breach the strike within the option's lifetime. No matter the motive, the most the buyers are risking is the initial premium paid for the puts.

Today's affinity for Baidu Inc (ADR) (NASDAQ:BIDU) puts merely echoes the growing trend on the ISE, Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), where the stock's 10-day put/call volume ratio sits at an annual high of 0.80. In other words, during the past two weeks, options buyers have picked up BIDU puts, relative to calls, at the fastest pace in more than a year.


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