The Wall Street Journal-20080213-Calls and Puts of Baidu-com Are Active Ahead of Earnings

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Calls and Puts of Baidu.com Are Active Ahead of Earnings

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A pack of options-market hunters spends earnings season migrating from one technology feeding ground to another and yesterday the group circled Baidu.com.

In the run-up to earnings from companies such as Amazon.com, Google, Microsoft, Apple and Cisco Systems earlier this year, traders bid up options for each, said William Lefkowitz, a derivatives strategist at vFinance Investments. That is because buyers of equity derivatives prize the abrupt moves that tech stocks often register in the immediate aftermath of earnings.

And none, perhaps, is as prone to swings as Chinese Internet search provider Baidu, which is expected to report earnings after the bell today. American depositary shares of Baidu traded at $245.43 -- more than double their 52-week low of $92.80, and roughly $184 below where it peaked as recently as November.

Reflecting that past behavior, demand for way-out-of-the-money February Baidu options was strong, even though they will expire at the end of this week.

In aggregate, about 36,000 calls and roughly 31,000 puts on Baidu had changed hands yesterday, according to TrackData. The premiums on contracts with imminent expiry were unusual, according to one market watcher.

"Even the February $310 calls were trading for over a dollar...for the people buying these, the stock has to go up $55 in the next three days -- that's a big bet," Mr. Lefkowitz said.

About 1,880 call contracts bestowing the right to buy Baidu stock at $290 before Friday's close changed hands, more than were outstanding at the start of trade. On the other end of the spectrum, about 4,300 February puts with a $220 strike price changed hands.

"There was a lot of two-way traffic" on Baidu, said Rebecca Engmann Darst, equity-options analyst at Interactive Brokers. "Heading into earnings, it looks like a lot of volatility plays."

One strategy likely at work: buying a straddle, where the trader purchases both puts and calls in out-of-the-money positions, believing the stock will swing but agnostic about the direction. In another tactic, the originators of the options may have sold the puts and calls hoping to pocket the premiums.