New Trade $QIHU – Do Yu Qihoo?

by Enis December 5, 2013 11:02 am • Commentary

The secular theme of Chinese internet continues to be at the top of our board for the next few years.  We think this story has only just begun, even after all of the excitement in 2013.

I discussed the changing technicals of the sector in my post 10 days ago:

Like other momentum leaders, Chinese internet stocks have come under pressure in the past month, no matter the news.  More than anything, market participants look to be searching for a reason to lighten up on big year-to-date winners like QIHU (still up 164% in 2013).  The stock has actually been under distribution for several months, after a huge run from April to September.  Yesterday’s selling brought it back to the lower end of its 3 month range:

QIHU daily, Courtesy of Bloomberg

QIHU daily, Courtesy of Bloomberg

Other momentum names with similar-looking charts to QIHU broke down recently, most notably FB and YELP both breaking important support on above-average volume yesterday.  QIHU has behaved better, and I would rather own QIHU over the next 2-3 years than FB or YELP, but the short-term technical pattern indicates a precarious psychology if the stock breaks the $75 support level.

Since then, QIHU has had a strong bounce, rallying up to its 50 day moving average:  

[caption id="attachment_33363" align="alignnone" width="600"]QIHU daily, 50 day ma in pink, 200 day ma in black, Courtesy of Bloomberg QIHU daily, 50 day ma in pink, 200 day ma in black, Courtesy of Bloomberg[/caption]

The $75 support level is still the key to watch.  However, the overall chart has the look of distribution, and the stock is now back below the declining 50 day moving average.  We’ve seen a number of momentum names gradually deteriorate after huge runs earlier this year, and finally break below support in rapid fashion.  The technical setup here looks quite similar, with a market backdrop that is rotating out of winners and into losers to clean up portfolios before the calendar turns.

We like the out-of-the-money put fly structure, like we have used on Z and YELP, to play for a move below 75, but above the rising 200 day moving average, over the next month and a half:

TRADE:  QIHU ($84.00) Bought Jan14 80/65/50 Put Fly for $2.60

-Buy 1 Jan14 80 Put for $3.60

-Sell 2 Jan14 65 Puts at $0.60 each, $1.20 total

-Buy 1 Jan14 50 Put for $0.20

Break-Even on Jan Expiration:

Profits: btwn 52.60. and 77.40 make up to 12.40, max gain of 12.40 at 65

Losses: btwn 50 and 52.60 and between 77.40 and 80, lose up to 2.60, max loss of 2.60 below 50 and above 80

Trade Rationale:  The fly cheapens the structure but still offers profitability in a wide range that is our technical area where we view a chance for a double or better in the structure as possible on a break of $75.