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Near-Term Speculators Pounce on Baidu.com, Inc. (ADR) (BIDU) Calls

BIDU's weekly call options are in vogue today

by 5/8/2013 11:29 AM
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Baidu.com, Inc. (ADR) (NASDAQ:BIDU) is in the bullish crosshairs today, following yesterday's news that the China-based search engine giant will acquire the online video unit of PPStream Inc for roughly $370 million. However, an analyst at Citigroup was quick to point out that "the acquisition does not strategically help Baidu address its fundamental challenges." Despite this warning, around 20,000 calls have traded so far, more than doubling the equity's expected intraday volume. By comparison, just 10,000 puts have changed hands.

Garnering notable attention has been the weekly 5/24 92.50 call, where north of 2,300 contracts have crossed the tape -- about three-quarters of them at the ask price, implying they were bought. More specifically, these calls were exchanged at a volume-weighted average price (VWAP) of $1.42. Since today's volume has surpassed current open interest levels, it's likely that new bullish bets have been implemented here. By purchasing the calls to open, traders are expecting BIDU to ascend past the $93.92 level (strike price plus the VWAP) by the close on Friday, May 24. This reflects a rise of 2.2% from the stock's present price of $91.94, as well as territory last explored in mid-February.

This penchant for calls over puts is simply business as usual for Baidu.com, Inc. (ADR). In fact, the equity's 10-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) call/put volume ratio sits at 2.00, indicating calls bought to open have doubled puts during the past two weeks. This ratio ranks above 87% of similar readings taken within the last 12 months, meaning traders have been snatching up bullish options over bearish at a faster-than-usual pace.

Likewise, BIDU's Schaeffer's put/call open interest ratio (SOIR) checks in at 0.73, with calls outstripping puts among options due to expire in the next three months. This ratio is docked in the 27th annual percentile, signaling near-term speculators have rarely been more call-heavy toward the equity during the past year. An unwinding of these bullish bets -- particularly at the May 92.50 strike, which holds open interest of more than 4,200 contracts -- could serve as a contrarian headwind for the stock.

This upbeat attitude toward Baidu.com, Inc. (ADR) seems unwarranted, given the security's year-to-date loss of almost 9%, as well as its year-over-year decline of more than 28%. Adding insult to injury, the shares have lagged the broader S&P 500 Index (SPX) by close to 14 percentage points during the past three months. On the charts, the equity continues to trade well below its 80-day moving average -- a trendline that not only coincides with the $92.73 mark, but has also acted as ceiling since BIDU's earnings-induced bearish gap on Feb. 5.


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