Earlier I wrote of the weak relative performance of some of the “Chortals” Chinese Web 1.0 stocks like SINA & SOHU, down 50% and 30% respectively on the year. There is little doubt that Alibaba’s (BABA) more than $100 billion market cap gain since its Sept. 19th IPO, (a whopping $285 billion in total) has sucked the air out of most other internet stocks the world over. There have been some exceptions though. Baidu (BIDU) is the search leader in China, formerly the second largest (behind Tencent) U.S. listed Chinese Internet stock by market cap, now third 🙁
The most recent leg higher in BABA seemed largely to do with enthusiasm about Singles Day sales that massively topped expectations. But that having passed coupled with today’s reports that the company will raise an additional $8 billion in the debt markets has caused BABA to pull back from this morning’s all time high at $120 to $115 as I write.
BIDU also made new all time highs this morning at $251.99, now trading at $243, placing the stock up 36% on the year. Trying to pick a top in much loved high fliers, especially those of such high quality like BIDU has been a foolish strategy in 2014. But as it relates to BIDU, it’s important to note that its U.S. peer Google (GOOGL) topped out months ago and has shown very poor relative strength.
BIDU is down 3.5% from today’s highs so it doesn’t exactly line up as a great short entry today. But if I were inclined to play for a pull back to the prior consolidation I would target $220 in the near term:
Establishing a range of 240 down to 220 between now and year end plays for a bit of a mean reversion trade. But here is the thing, market movement have slowed down dramatically in the last few weeks, and heading into the U.S. holiday season, they have the potential to stay that way. So buying what look to be cheap options for directional plays are probably expensive no matter their vol. The one year chart of 30 day at the money implied vol (IV) in BIDU shows options prices once again approaching 52 week lows:
If I were to step in here, I would look at the following trade to target a pullback to $220:
Hypothetical Trade: BIDU ($243) Buy Dec 240/220/200 Put Butterfly for 4.25
-Buy 1 Dec 240 put for 8.45
-Sell 2 Dec 220 puts at 2.35 each or 4.70 total
-Buy 1 Dec 200 put for .50
Break-even on Dec Expiration:
Profits: between 235.75 and 204.25 make up to 15.75, max gain of 14.75 at 220
Losses: between 235.75 and 240 & between 200 and 204.25 lose up to 4.25 and below 200 and above 240 lose full 4.25
Rationale: The momentum in BABA has to cool down at some point (it does doesn’t it?) And judging by today’s intra-day reversal in BIDU that coincided with one from BABA, it’s likely that BIDU would run out of steam over the next few weeks if BABA did. This structure looks to spend as little as possible from a premium standpoint and has a very realistic breakeven of 235.75.