Baidu options suggest possible breakout after earnings

By @ibtimes on

Baidu Inc's fourth quarter earnings could provide the catalyst for the Chinese search engine's shares to break out of their near five-month range.

The company is to report earnings after the close of stock market trading on Monday. China's top search engine beat profit expectations in the past four quarters but may not repeat that for the fourth quarter as margins slipped and new customer additions slowed.

Options expiring on a weekly basis are pricing in about a 7 to 8 percent move by this Friday, said Steve Place, a founder of options analytics firm investingwithoptions.com in Mobile, Alabama. The majority of that premium is coming from earnings.

Place noted that the estimate corresponds very closely with the stock's five-month trading range of $95 to $115.

If the options are underpricing this move, then we will most likely see a break out of this technical range and a continuation of the direction of the earnings gap, Place said. The shares rose around 135 percent in 2010.

So if you think Baidu will break that range this week, you want to be a net option buyer, and vice-versa with selling, he said. Baidu has been rangebound for nearly five months, frustrating both shorts and longs.

Baidu is expected to post revenue of $361.03 million in the fourth quarter, according to Thomson Reuters I/B/E/S. This is in the range of the company's own forecast of $354.2 million to $364.7 million.

Place also noted the average one-day change on Baidu for the past four earnings events has been 7.8 percent, and the maximum change for the share price on the day after earnings has been 9.38 percent. So it feels that the current options pricing is coming in line with previous events, he added.

Baidu's option activity both on the call and put side has been active on Monday in the short-term weekly options that expire this Friday heading into their earnings.

So many investors are expecting a significant move in either direction in the stock by this Friday, said William Lefkowitz, options strategist at New York-based brokerage firm vFinance Investments.

With the stock trading at about $107.50 this morning, the February weekly call options are very active from the $105 through the $120 strikes.

All have accumulated more trading volume than their respective open interest suggesting fresh positions were initiated. The call buying in the weekly options indicate investors are looking for a solid move upward by this Friday, Lefkowitz said.

On the other hand, Lefkowitz said the $100 and $95 weekly strike puts have also exceeded their respective open interest which indicates that some investors are looking for this stock to make a large downward move by this Friday.

In all, about 37,000 calls and 23,000 puts traded in Baidu by 12:51 p.m. EST, data from options analytics firm Trade Alert showed.

Equity call options convey the right to buy a stock at a fixed price at any time until expiration, while puts give the right to sell the stock at a preset price up to a certain date.

The stock's average 30-day option implied volatility, the expected magnitude of share price fluctuation, is still at the lower end of its range at 46 percent compared to the past year. But that may be a function of depressed market volatility as well as the technical range the stock has been in, Place said.

On the Nasdaq, Baidu shares rose 2.09 percent to $108.76 in afternoon trading.

(Reporting by Doris Frankel; Editing by Andrew Hay)

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