Calls Hot Ahead of Baidu Earnings

Chinese stocks are broadly higher today thanks to stimulus hopes

by Patrick Martin

Published on Aug 16, 2019 at 10:07 AM

U.S.-listed Chinese stocks are higher across the board today, after China's state planner outlined plans to boost disposable income this year and next, in order to spur a stalling economy. At last check, China-based search engine Baidu Inc (NASDAQ:BIDU) was up 0.7% to $95.02, shaking off a price-target cut from J.P. Morgan Securities to $110 from $120. Adding to the intrigue is Baidu's turn in the earnings confessional, set for after the close on Monday, Aug. 19.

Baidu stock needed a day like today in a bad way. Prior to today, BIDU had turned in only five sessions in the black in the last 30 days, to the tune of a one-month deficit of 17%. This culminated in a six-year bottom of $93.39 yesterday, with pressure looming overhead at the shares' 20-day moving average. However,  BIDU's 14-day Relative Strength Index (RSI) was down at 24 as of Wednesday's close, showing the equity's been technically oversold and was due to bounce. 

Looking at Baidu's earnings history, the stock has closed lower the day after earnings in four of the past eight reports, including a 16.5% drop back in May. Over the past two years, the shares have swung an average of 7.3% the day after earnings, regardless of direction. This time around, the options market is pricing in an extremely elevated 11.5% swing for Tuesday's trading. 

For a stock staring at a 56% deficit year-over-year going into today, there's still a semblance of optimism among analysts and short sellers. There are 13 analysts covering BIDU, and five rate it a "strong buy," with zero sells on the books. Plus, short interest tapered off in the most recent reporting period, and only accounts for a slim 3.6% of the equity's total available float.

In the options pits, traders have been focused on calls. At the International Securities Exchange (ISE), Cboe Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the security's 10-day call/put volume ratio of 2.53 ranks in the elevated 77th percentile of its annual range. So not only has call buying more than doubled put buying in the last two weeks, but the interest in long calls over puts has been stronger than normal.

Echoing this, the equity's Schaeffer's put/call open interest ratio (SOIR) of 0.52 ranks in the 8th percentile of its annual range. This suggests near-term call open interest extremely outweighs put, something that is highly unusual.


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