Baidu, Inflation, European Union And Protection

| About: Baidu, Inc. (BIDU)

Baidu (NASDAQ:BIDU), the Google (NASDAQ:GOOG) of China, may have to race on a different race track for a while with the Chinese government attempting to tame inflation in the Chinese economy. Instead of formula racing, the company may have to settle for stock car, still fast, but not as fast.

Additionally, in the Q3 2012 earnings call, the company indicated some of the company's customers associated with the export business were not doing so well. With the European Union as China's largest trading partner, and the turmoil occurring of late in the European Union related to sovereign debit, China's export business may have slowed even more. And if Baidu's export-related customers have reduced their advertising with Baidu, then Baidu's revenues may also been negatively impacted.

In the previous earnings call, the company indicated three factors are underpinning the company's accelerated year-over-year growth of 85%: traffic growth, enhancements to Phoenix Nest platform and increased spending by large accounts. Baidu's Phoenix Nest online marketing system is similar to Google's AdWords offering. A negative impact to any of these three elements could result in decreased earnings for the company.

The company added a new personalization feature to their offering in September of 2011, enabling automatic customization of a user's homepage. Additionally, the company is extending its partnerships with mobile phone makers. Baidu is currently the default search engine for over 80% of branded handsets using the Android operating system in China. Competitors to the company include Sina (NASDAQ:SINA) and (NASDAQ:SOHU).

With the company reporting earnings on Wednesday, February 16, 2012, an investor in the company might be uneasy at this point. The company's stock price, while ballistic over the last two years, has been stuck in a trading range between $100 and $165 over the last year as shown below:

Click to enlarge An uneasy investor might consider entering a collar position for protection. A collar may be entered by selling a call option against the stock and using some of the proceeds from selling the call option to purchase a put option.

Using PowerOptions tools, a collar was found for Baidu with a potential return of 2.6% (29.7% annualized) and a maximum potential loss of 8.9%, even if the price of the stock goes to zero. The selected position is shown in the table below:

Click to enlarge

The specific call option to sell is the 2012 Mar 145 at $6.50 and the put option to purchase is the 2012 Mar 125 at $2.82. A profit/loss graph for one contract of the collar is shown below:

As a bonus, if the price of Baidu's stock is greater than or equal to the $145 strike price of the call option at option expiration in March of 2012, the position will return 5.6%. For a Baidu stock price less than the $125 strike price of the put option, the value of the collar will remain unchanged with an 8.9% maximum loss, even if the price of the stock goes to zero. If the price of Baidu's stock increases to around the $150 range, rolling the position may be an option for increasing the potential return.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.