China tech has been crushing Silicon Valley
08/01/17

If there were three words to sum up 2017, they would be China, China, and China.

Sure, U.S. tech stocks have found plenty of love as investors piled into the likes of Apple (NASDAQ: AAPL), Amazon NASDAQ: AMZN), Facebook (NASDAQ: FB), Microsoft (NASDAQ: MSFT), and Alphabet (NASDAQ: GOOGL). But the performances of those mega-cap behemoths have paled in comparison to peers across the Pacific.

AMZN for instance, is up 32 percent this year. But that’s less than half the gain of Hangzhou-based e-commerce giant Alibaba (NASDAQ: BABA). FB has advanced 47 percent, which sounds pretty good until you compare it with the 90 percent run at Beijing-based social media player Weibo (NASDAQ: WB). GOOGL up 19 percent? That’s just half the 38 percent upside in rival search giant Baidu (NASDAQ: BIDU).

All told the Nasdaq Golden Dragon China Index has surged 49 percent since January, almost triple the run of the domestically focused Technology Select Sector Index.

Speaking of BIDU, it just had its best month in over two years. Traders started piling into the name in early July as the company looked to get smart about artificial intelligence.1 They kept buying as management inked deals with other firms, and then responded to a strong quarterly report by catapulting the stock to its highest level since April 2015.2

Buyers focused on common stock for most of the run, but in the last two sessions they have turned to options. On Friday, for instance, BIDU options not only traded more than 7 times their average in the preceding month. It also accounted for more than 1 percent of volume in the entire options market. That giddiness continued on Monday as buyers continued to look for more upside – and sooner rather than later.

BIDU’s 4-August 230 calls led the charge, turning over more than 6,300 contracts. The first blocks changed hands in the opening minutes for $1.87, followed by later blocks mostly fetching $2.21 and $2.80. 

Baidu (BIDU), 10/10/14-7/31/17

Source: OptionsHouse by E*TRADE

Calls fix the price where a security can be purchased. They can leverage a relatively small rally but also go worthless if no move occurs. Should BIDU advance another 4 percent to $235 by the end of this week, those calls will double. A 5 percent run to $237.50 will triple their value. But if the shares stall and remain below $230, the contracts will turn into donut holes. Breakeven, if you care about such things, is around $232.50.

BIDU ended the session up 2.89 percent to $226.35. Options volume was more than twice the monthly average this time, with calls outstripping puts by almost 3 to 1. There was also heavy buying in the 4-August 235 calls and the 4-August 240s. Contracts expiring this week dominated the tape, so they don’t expect to get old waiting for a breakout. 

Here are a few other Chinese tech stocks that tend to trade a decent number of options:

  • BABA, as mentioned above, trades 138,000 contracts on average.
  • JD.com (NASDAQ: JD), an e-commerce stock, is up 78 percent on the year. Average monthly options volume is 38,000 contracts.
  • Momo (NASDAQ: MOMO), a mobile social-media stock, is up 139 percent on the year. Average monthly options volume is about 8,000 contracts.
  • Vishop (NYSE: VIPS), an online retailer, is up 12 percent on the year. Average monthly options volume is 7,700 contracts.

 

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1. Bank of America Merrill Lynch: AI: open platform strategy to build ecosystem on core competences. 7/5/17.

2. Microsoft (Press Release): Baidu and Microsoft join forces in the intelligent cloud to advance autonomous driving. 7/18/17. Fortune: China’s Baidu Partners With Paypal to Tap Chinese Tourists. 7/26/17. Marketwatch: Baidu posts first profit in three years. 7/28/17.