Baidu Bulls Hit The Options Hard

Baidu Bulls Hit The Options Hard
Andrew Wilkinson, Interactive Brokers, 01.16.10, 11:05 AM EST
Buying call options on Baidu has created life-changing wealth in the past year for some investors. The fervor for shares is still strong.

Baidu ( BIDU - news - people ): Bullish investors continue to trade January contract calls and puts on the Chinese language Internet search provider today even with expiration close at hand. News reports today indicate some at Credit Suisse ( CS - news - people ) anticipate Google ( GOOG - news - people ) may exit the Chinese market as soon as February. Disbanding Google operations in China could allow Baidu to swoop in and procure one-third of the U.S. company's market share there. Shares of BIDU traded 0.75% higher to $467.86 around noon Friday.

Baidu bulls bought roughly 3,200 calls at the January $470 strike for an average premium of $2.08 apiece. These contracts will expire out-of-the-money and worthless unless shares rally above the $470 level. Investors long the calls break even if the stock rallies up to $472.08 before the contracts expire. Additional buying interest appeared as high as the January $480 strike, where 2,000 calls were picked up for an average premium of 48 cents per contract. Perhaps traders buying these out-of-the-money contracts hope to enjoy short-swing profits by selling the lots by the end of the day for more than the average premium paid.

Optimism is apparent on the put side as well. Investors sold 3,400 puts at the January $460 strike to take in premium of $2.35 each. Another 1,900 puts were shed at the in-the-money January $470 strike for an average premium of $5.85 per contract. In-the-money put sellers are happy to have shares of the underlying stock put to them at an effective price of $464.15 each if BIDU's share price trades below the $470 strike price through expiration.

Jim Oberweis told his subscribers to buy Baidu at $79 and told them to buy more at $110 in early 2009. Click here for Oberweis' current advice and access to the complete model portfolio in the Oberweis Report.

Alcoa ( AA - news - people ): Medium-term optimism on the largest producer of aluminum took root in the July contract today despite the 1.5% decline in the value of the underlying shares to $15.58. It looks like one investor purchased 20,000 calls on the stock at the July $20 strike for a premium of 51 cents per contract. The large bullish stance positions the trader to amass profits if Alcoa's shares surge more than 31.5% over the current price to surpass the break-even point at $20.51 by expiration in six months. Option implied volatility is down 7.17% on the day to stand at 38.05%.

Sprint Nextel ( S - news - people ): Shares of the wireless communications company were trading 1.9% higher Friday to $3.76. Options activity in the August contract indicates that one investor is positioning for a significant rally in shares of the underlying stock in the next seven months to expiration.

It looks like the trader purchased 15,000 calls at the August $7 strike for a premium of 12 cents per contract. Profits on the calls accrue if Sprint's share price jumps 87% from the current level to surpass the break-even point at $7.12 by August expiration. On trades like this it's less likely that the investor has an eye on the strike price as a target price, but uses a larger amount of relatively inexpensive call options to play out a directional play on the underlying stock. In this case the delta on the $7 call option indicates a 15% chance that Sprint's shares will land in-the-money at expiration, while gamma tells us that a $1 rally to $4.80 (an increase of 26%) would shorten those odds to 28%. We note that shares have not traded above $7 since Sept. 19, 2008.

Pfizer ( PFE - news - people ): It looks like one investor rolled a large chunk of now in-the-money call options in the January contract on the global pharmaceutical company forward to a higher strike price in the February contract Friday. Shares slipped slightly lower during the session, falling 0.25% to $19.31. The January $19 strike had approximately 62,000 calls sell for an average premium of 43 cents per contract, spread against the apparent purchase of about the same number of calls at the higher February $20 strike for a premium of 28 cents each. The calendar roll results in a net credit to the investor of about 15 cents per contract. It is unclear how much the trader initially paid for the January contract calls, but looking at the trade in isolation, this individual pockets 15 cents per contract on the transaction. Elsewhere, traders attempted to lock in recent share price gains on the stock by buying 7,700 in-the-money puts at the February $20 strike for a premium of $1.06 apiece. The put contracts provide protection to traders in case Pfizer's shares slip beneath the break-even point at $18.94 by expiration next month.

Pfizer has a fat 3.7% yield, but is Merck, with a 3.9% yield, your better buy in pharmaceutical stocks? Click here to check ratings on hundreds of dividend-paying stocks in Investment Quality Trends.

CurrencyShares Euro Trust ( FXE - news - people ): With the euro under pressure Friday as Greek bond yields rise--indicative of rising Eurozone tensions--it appears one investor sold February call options at the $1.50 strike to reduce the outlay for the same strike put options. By doing so the investor bearish on the euro reduced the cost of downside exposure for the euro by 2.2%. Elsewhere another investor appeared to buy a substantial amount of 5,000 put options expiring in June at the $1.10 strike. If such a decline in the euro was to play out, since it's currently trading at $1.438, would be indicative of a huge slide of confidence in the Eurozone.

Andrew Wilkinson is senior market analyst at Greenwich, Conn.-based Interactive Brokers. Reach him via e-mail: ibanalyst@interactivebrokers.com.