Name That Trade – BIDU Edition

by Enis September 13, 2012 11:14 am • Commentary

Fortunes are routinely made and lost in stocks.  BIDU is a great example of a former fortune maker, rising almost 1500% from its 2009 low to its 2011 high.  Interestingly, BIDU is actually near 2 year lows despite the Nasdaq making new highs recently.  Recent headlines have focused on a nascent competitor, QIHU, potentially taking market share away from BIDU in Chinese search.  I got curious as to how the options market looked given BIDU’s unique stock behavior in this bullish market.

First of all, BIDU realized volatility is at the low end of the last 2 years, but not as quiet as the broader market’s realized volatility.  Here is a chart of 100-day realized volatility in BIDU:



It has ranged between 32 and 60 in the past 2.5 years, hovering around 40 right now.  Shorter term realized volatility measures (10, 30, and 50 day) are a bit higher, closer to 45, as the stock has fallen from almost 135 to 108 in the past month.  Here is the 2 year chart of BIDU, showing the broad range between 100 and 160 that the stock has carved out, now sitting on the lower end of that 2 year range:  



Taking a look at the options market, I noticed the discrepancy between Oct and Dec implied vol.  First, let’s look at October options:



The 110 strike options in October are priced around 39.50 implied vol.  October expiry does not catch BIDU earnings, but BIDU earnings have not been much of a stock mover over the past couples years anyways.  The stock has moved less than 4% on 5 of the last 6 earnings reports.

Moving out to December expiry though, we can see the more elevated implied vol levels:



The 110 strike in December is priced closer to 43.5 implied vol.  That is a 4 vol difference between Oct and Dec expiry in BIDU.  Part of this premium in December is due to the broader market’s term structure.  For example, in the VIX Futures Snapshot post from this morning, you can see the steepness of the front 2 months vs. the next 2 months, indicating the general steepness in the SPX implied volatility term structure as well.  BUT, BIDU’s stock performance in the past month has been much different than the SPX index.  BIDU has declined more than 20% in the past month, back down to near its lows of the past 2 years.  100 is clearly a crucial technical level.

Taking that as my starting point, one potential trade in BIDU that I might initiate in the next few days is one that would involve buying Oct and selling Dec in some fashion.  I have considered put calendars or call calendars, but have yet to make up my mind with regards to risk/reward.  I have little directional bias, but I do think long Oct vs. short Dec will have a hard time losing money if it is a close-to-flat delta trade at initiation.