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Bearish Betting Hits Fever Pitch on China's Baidu Inc (ADR) (BIDU)

Baidu Inc (ADR) (BIDU) puts are being bought at an annual-high clip, as China-based stocks suffer

Jan 7, 2016 at 11:35 AM
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Baidu Inc (ADR) (NASDAQ:BIDU) -- often called the Google of China -- has been obliterated this week, in light of sinking Shanghai stocks and a weak yuan. Today, the shares are down 5% at $176.32, bringing their week-to date -- and 2016 -- deficit to 6.7%. Over the past month, BIDU has shed 14%, and option bears are coming out in full force.

During the past two weeks on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), BIDU has racked up a 10-day put/call volume ratio of 1.10. This reading stands at an annual high, reflecting a much healthier-than-usual appetite for bearish bets of late.

Echoing that, the stock's one-day put/call volume ratio just hit an annual high of 1.74 yesterday, according to Trade-Alert. And during the past two weeks, the out-of-the-money January 2016 160-strike put has seen the biggest increase in open interest, with most of the contracts bought to open. These puts will move into the money if BIDU breaches $160 -- territory not charted since October -- by next Friday's close, when front-month options expire.

Today, intraday options volume is running at twice the average clip, with possible buy-to-open action spotted at the weekly 1/8 172.50-strike put. By purchasing the puts to open, the buyers expect BIDU to sink even deeper -- and breach the $172.50 level -- by tomorrow's close, when the weekly options expire.

However, most active is the February 185 call, with more than 1,400 contracts exchanged. Most of the action transpired on the ask side, and volume has surpassed open interest, suggesting the contracts are being bought to open. By doing so, the traders expect BIDU to rebound atop $185 by expiration at the close on Friday, Feb. 19.

But, those call buyers could have an ulterior motive: protecting their short positions. Short interest on BIDU surged nearly 25% during the most recent reporting period. By purchasing out-of-the-money calls, the shorts can reduce their risk in the event of a big bounce.

For "vanilla" traders, now is an opportune time to play with BIDU's short-term options. The stock's Schaeffer's Volatility Scorecard (SVS) stands at a lofty 83, suggesting BIDU has tended to make outsized moves during the past year, relative to what the options market has priced in. In fact, BIDU was a top-notch volatility trade in 2015.

On the charts, Baidu Inc (ADR) (BIDU) is set to end beneath its 32-week moving average for the first time since mid-October. This trendline ushered BIDU lower in the first three quarters of 2015, and could once again stifle rebound attempts.

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