Baidu, Inc. ADS (NASDAQ: BIDU) is about to split on a 10-for-1 basis. When the panic selling was in on Thursday, May 6, and then during parts of Friday, May 7, Baidu shares went under $640. After a huge Monday, followed by continues interest today, Baidu is now back at $700 versus a 52-week range of $229.55 to $718.
Had it not been for Google Inc. (NASDAQ: GOOG) withdrawing from China, Baidu’s fate may have been one with far more competition.
Last month, Susquehanna raised its price target to a whopping Street high of $1,000 per share from $728. When was the last time you saw a 10-for-1 stock split, let alone a $1,000 call?
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Buying Baidu as a stock after such a run-up is already speculation more than a buy-and-hold strategy, so it is interesting to run the matrix of forward call options to see which offers the most upside for the lowest premium paid in the coming months.
Going out of the money may not be enough here, so it’s out of the money on an all-time basis, which may hold the most bang for the buck (or yuan).
May options expire on May 21 — too close, in my opinion.
A look out to September shows a premium of close to $80 for the BIDU Sept 710 Calls (BIDU 100918C00710000) and close to $60 premium for the BIDU Sept 750 Calls (BIDU 100918C00750000), making them far too expensive to even consider.
This leaves June as the middle ground for premiums versus time value. Expiration is June 18, so you still have more than five weeks worth of time value.
The BIDU June 750 Calls (BIDU 100619C00750000) (which will be the 75 calls after tomorrow) are trading for close to $24. The BIDU June 800 Calls (BIDU 100619C00800000) go for $12.20, and while this strike price is way out of the money today and versus the all-time high, this play is merely for exposure.
Based on some back-of-the-envelope calculations, if Baidu challenges all-time highs after the split, then those $750 calls would be worth close to $32, but those $800 calls would be worth closer to $16 or $17.
Yes, this is a very bullish call option strategy if you take it on face value. The issue here, though, is not a call about being excessively bullish. It is merely about getting upside exposure in a contract that will easily translate AFTER the stock split and still offer good upside if we see another 10% pop in the stock when analysts adjust their targets after tomorrow.
