A Safer Way to Invest in Baidu Post Run-Up: Options

Baidu, Inc. (NASDAQ:BIDU)  shares have jumped more than 260% from their 52-week low, which is making many long-term investors wary of buying in at such high relative pricing. One solution to this problem may be using conservative options strategies that can help hedge against any retracements, while providing a steady “virtual dividend” during any move higher.

By Simon Monger (SUMFOLIO.com) -- Many experts remain bullish on Baidu thanks to its large presence in China, which appears to be recovering nicely from the economic decline. Meanwhile, the launch of its new online advertiser platform has led to expectations of higher revenues as soon as the current quarter, according to its Chief Executive Officer Robin Li in an interview with the Wall Street Journal.

 Last quarter, Baidu’s net profit jumped 45% from a year ago to $56.1 million, as revenues rose 37% to $160.7 million, as online advertising spending moved upward along with the broader economy. Meanwhile, the search engine remains dominant in China’s growing market with a 62% market share in the second quarter of 2009, according to Analysys International.

Conservative Strategies for Bullish Investors
Covered call options represent one of the most popular strategies for conservative investors looking to hedge their position in Baidu. The strategy involves writing, or selling, one call option per 100 shares of stock owned. The proceeds can then be kept as a “virtual dividend” to offset any declines or simply increase returns on the stock.

Currently, Baidu’s Sept ’09 $370 calls are trading at $6.50 per contract, which means that investors could obtain $650 in exchange for agreeing to sell their stock at $370 on or before September 18, 2009 if the option buyer wishes. Of course, if the stock price doesn’t increase that much during the time period, then the investor will be able to repeat the strategy next month.

Long-term Equity Antici-Pation Securities, or LEAPS, represent another options-based alternative to common stock ownership. This strategy involves purchasing long-term stock options that do not expire for a couple years, and using them as a stock substitute. The advantage is that they are much cheaper to acquire and offer greater leverage on returns.

Currently, Baidu’s Jan ’11 $350 calls trade at $80.80 per contract, meaning that an investor could acquire the rights to 100 shares at $350 for $8,080 right now. The breakeven point would then be approximately $430.80 at or before January 21, 2011. Given the low cost basis, each dollar the stock trades over this amount equates to a far higher return on investment than the stock itself.

Conclusions
Baidu remains a strong performer amid a strong recovery in China, but investing in a stock that has run-up so much can be risky
 

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SOURCE: http://sumfolio.com/a-safer-way-to-invest-in-baidu-post-run-up-048/