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Baidu Inc (ADR) (BIDU) Put Buyers Brace for a Pullback

Front-month puts were popular in Baidu Inc's (ADR) options pits last Friday

by 5/27/2014 11:02 AM
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Option Brief: Baidu Inc (ADR) (NASDAQ:BIDU) shares gained 2.5% on Friday. Not surprisingly, call activity accelerated, as 31,000 contracts crossed the tape -- a 29% mark-up to the average daily pace. However, among non-expiring contracts, it was a put that took center stage.

Diving into the details, the June 165 put was BIDU's most active option among those that didn't stop trading at Friday's closing bell. Just over 2,800 contracts changed hands here -- the majority at the ask price, suggesting they were bought. Also, open interest spiked more than any other strike, making it safe to assume the bearish bets were freshly initiated.

Friday's out-of-the-money put buyers are either awaiting a short-term pullback in BIDU shares, or protecting against one. If the contracts were bought by "vanilla" option bears, the goal is for the stock to tumble below $159.72 (strike less the volume-weighted average price of $5.28) by the close on Friday, June 20 -- when front-month contracts expire -- at which point, profit will begin to accumulate with each additional step south BIDU takes. On the other hand, if the puts were purchased as hedges, the goal is to lock in a minimum price at which the shares may be sold ($165), in the event of a significant move lower between now and June options expiration. Regardless of the motive, the traders risk losing no more than the initial premium paid.

One reason for thinking the puts may have been protective is Baidu Inc's (ADR) (NASDAQ:BIDU) stellar technical performance. The shares -- trading slightly higher this morning at $168.54 -- have gained more than 75% year-over-year, and nearly 20% since hitting a year-to-date low of $140.66 on April 7. With such a steep run-up, Friday's put buyers may be fearful that a short-term pullback could be in the cards.

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