Baidu.com (BIDU, $134.09, down $44.80) took a pounding today as the China-based Internet search engine company saw its shares decline 25%. A report that Baidu sold paid listing links to unlicensed medical sites with unproven claims for their products weighed heavy on the stock.
The news crippled an already weak stock to begin with and the fact that China has been hit by scandals related to contaminated food and drugs was a one-two punch that floored Baidu. The reaction may have been extreme but when Baidu fell below $200 last week, the damage was done. The news just accelerated Baidu’s quick ascent to what now appears like a test of the $100 level.
The break below the $200 level was big for Baidu and today’s test of the $130 level was the last line of support for Baidu until $100. Just how serious is a threat of $100 a share? Considering there was plenty of action in the November 100 puts (BDQWT, $2.50, up $2.45) there are some option traders who say the chances are pretty good. Believe it or not, these put options were up an astounding 4,900% as over 7,000 contracts traded hands. Open interest stood at less than 1,000 contracts for these contracts before today. The puts opened for less than a quarter…
The December 100 puts (BDQXT, $8.75, up $7.15) also had a monster day as they opened at $2.60 and were up 450% from Friday’s close of $1.60. Both options are a little expensive now as you would imagine and there may be a snap-back rally in the stock before it tests the $100 level. Then again, the stock could hold support here and never test $100.
Either way, the easy money has already been made with Baidu but there may be another opportunity for us down the road. Let’s stay on the sidelines for this one until we get a clearer picture.
Rick Rouse
Rick@OptionsMentoring.com
