May 6 - BIDU Follow up

A quick update on BIDU, after the massive gap up following the earnings call, the stock has come down a little and stabilized. However, after a decrease in implied volatility, it has jumped again as more uncertainties loom in the near future.



China is tightening its fiscal policy to cool the housing market and prevent a bubble, this will in the long-run cool down the Chinese stock market, but my trade is very near-term and this doesn't effect me much - although its not completely irrelevant.

Note worth is also how Jim Cramer is pushing BIDU at these levels. He obviously knows of the impact he has on the retail investors and with the 10-for-1 split in BIDU stock coming up on May 12th, he is looking to push this on retail investors and now it looks cheaper to own the stock.

A stock split doesn't change anything about the underlying, it just divides the current BIDU pie into more slices. BUT the majority of the time, a split has a rallying effect on the stock right after the split, this may push up the stock closer to my short call strike price of $800... which will be $80/share after split!!!

I'm watching this stock closely and following it day by day.

More posts to come.

May 1 - More Fall Out From Credit Suisse's Moronic Move

Hi all, in the past couple of trading days I've been doing some more research and can't help but find collective outrage at the stupidity of Wallace Cheung, the analyst at Credit Suisse, who downgraded BIDU to "underperform" a day before stellar earnings.

From Motley Fool, in a article titled, "This week's 5 Dumbest Moves":

This week's bonehead analyst move goes to Credit Suisse's Wallace Cheung, who downgraded Baidu (Nasdaq: BIDU) shares on Monday, just two days before China's leading search engine was scheduled to post its quarterly financials.

Why would an analyst come down on a company with improving fundamentals, after it had obliterated Wall Street's profit targets in each of the three previous quarters?

In response to the article, a comment that couldn't express my views more reads:

Thank you for calling out Credit Suisse and Wallace Cheung for that ridiculous downgrade of Baidu. Everyone is upset with banks and want them held responsible for questionable activity, I think these analysts and research firms should be under the same scrutiny.

Furthermore, here is a line from yours truly posted on the StreetInsider.com's article on the downgrade:

I would love to know what kind of game Credit Suisse is playing, downgrading a stock a day before the earnings call.... which now in hind sight happened to be the driver of a $100 gap up the day after !!!! Either your analysts are really lost OR you had other motives!!!! Were your traders buying all along on the "downgrade" news, eh Credit Suisse?

On a lighter note, BIDU was down $21 on Friday trading bringing the price to $689, and the price of the 800 JUN calls hovering around $8/share ....... about a $4/share paper loss for me. BUT I intend to hold the position.

April 29 - To the edge of oblivion and back

What a mess! If BIDU posted any better results I would bet they were faking! Everything was stellar... they beat on EVERYTHING!

Yesterday was dooms day as I anticipated what the $90/share jump in their prices will do to my account this morning. I was right, sure enough this morning the big bad red sign on my account told me that if I don't post collateral the account will be liquidated!

How can I allow them to liquidate the BIDU positions when they are still $90 out of the money!!!! After a hectic morning, the funds were wired from my bank to the account to cover the margin!

As I suspected the option prices had been bid up to about $15 this morning! With the extra liquidity now I am ready to manage these positions without some brokerage selling everything to cover their own ass!

I will post more as we go.... stay tuned!

April 28 - BIDU follow up

BIDU reported stellar results..... Credit Suisse, I would love to know what you're traders were up to yesterday when you downgraded the stock!!!!

Stock is up to $710 in after-market trading and according to my option modeller, this increases the prices of the calls I'm short to $15 a piece - increasing my required margin for holding these to unpredicted levels.

I will look to pre-market tomorrow to see if I should liquidate these and take a loss or if I can ride it out.

April 27 - Interesting action by Credit Suisse (BIDU)

This morning BIDU was downgraded by Credit Suisse from 'Neutral' to 'Underperform'. Traders responded by selling, and the stock price currently stands at $628, down about 2% on the day.

This downgrade comes at a very interesting time - right before the earnings call tomorrow. Do they know something?? Assuming they do know exactly what's going to happen on tomorrow's call... are they downgrading to depress prices so their traders can buy before the prices jump tomorrow?? OR are they trying to get ahead a disappointing call for an "I told you so" kinda thing??

As for my position, the JUN 800 calls are trading at $2.20, which gives me about $1.80/share of paper gains. Realistically these calls should be trading a lot lower than $2.20 given that they expire in less than 8 weeks and they are still $170 (27%) out of the money, BUT the implied volatility associated with the earnings call coming up tomorrow is keeping option prices inflated.

Once the earnings call is over, the volatility will decrease and prices will come down (given that the stock price doesn't jump up huge). I will be watching this closely.


Now it's just a waiting game until tomorrow's call after market closes
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April 19 - BIDU Follow up

Well the time has come and finally the trend is broken!!!

On March 25th I posted that I deemed BIDU to be over-bought and in an unsustainable uptrend. As mentioned on the post I sold several JUN 2010 calls with an 800 strike for $4 premium per share ($400/contract). After a period of time where the prices still kept increasing on the uptrend line the break came on Friday after the market reacted to the negative news on Goldman Sachs. As of right now the stock has declined another $29 (4.6%) and it's only mid-day. The call options are trading at $1.55/share.

I will not buy them back yet as I think this dip will be followed by further downside. Even if the downside is not material it has delayed the uptrend enough that $800/share by June expiry is still far away. I'm looking to either let them expire or buy back at close to zero to close the position.

March 25 - BIDU BIDU BIDU

Wow, this is just incredible. BIDU is up almost 6 fold since its bottom early 2009 at around $100. The long-term weekly chart is shown here:

This has gone from a buy to crazy panic buying frenzy! I don't like how fast it's going up, it's unsustainable!

I'm looking for downside here, but I can't tell when the downturn will begin and that makes buying puts a little harder. One thing is for sure that once this bubble bursts (in the short-term) there will be down side, and it will come fast! Below is the daily chart:

I'm going to start selling calls here for JUN 800 level. Today I sold some for $4.00/share or $400 per contract. I expect that this stock may climb more as more bad news about Google's battle with the Chinese Government hits the wires. So I expect to sell more calls at a higher level.

I expect that the uptrend will break to the downside with the slightest favorable news for Google. More on this soon...

March 19 - BIDU Trade Setup

BIDU, the Chinese search engine, has been benefiting much from the rumors that Google may close operations in China. According to an analysts estimates, this means 30% more business for BIDU which is certainly sizable. On all this BIDU's price has increased dramatically. Let's look at the one year plot on a daily chart with trend lines. I've also plotted volume and option volume for puts and calls. We can see the spikes in option volume.



The channel is visible and the break-out above it. Good rumors always drive up a stock's price, but the news release may disappoint. I don't think Google will just leave all operations in China and deprive itself of huge revenues associated with the Chinese operation, but then again.... This is Google! Will they put morals before revenues? We will see on Monday!

For now I see a huge run-up in BIDU and am thinking about a short position incase the news isn't as good as expected. I will obviously never short the stock as the risk is HUGE! I'm looking to buy puts for limited down side exposure. I've put in a bid for the JUN 340 puts for $1.35/share. If BIDU should skyrocket from Monday's news I will lose my premium which is $135 for every contract, the price of the contract will look as the plot below, depending on the price of the underlying (BIDU stock):


The returns are exponential if the prediction is correct. If BIDU should continue to go up then the price of the contract will move towards zero. I should mention that I do not wish to hold these until June, this is a leverage play. If BIDU goes down fast, the options will increase quickly and I can sell at a high premium (as seen in the plot). I don't expect that the stock price will go to $340. But anything below $500 will get a nice return.