Stock Option Investment Advice

Easy on NetEase

NetEase’s (NTES) stock option volume went ballistic yesterday, both call option and put option. NetEase’s stock price was also down 5% on high volume.

NetEase operates interactive online applications in China. It provides products in three segments: online game services, advertising services and wireless value-added services.


NetEase’s competitors include Sina Corp (SINA), (SOHU) and TOM Group (private).

NetEase’s stock price is up over 100% from its low price in December of 2008 and has taken a pretty good hair cut over the last couple of weeks. Yesterday’s haircut was in response to China’s increased online gaming restrictions related to foreign companies. As a result, NetEase may have to forgo marketing the game World of Warcraft in China, as NetEase licenses the game from a U.S. company Activision Blizzard (ATVI).

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OCR Chart

Call option volume for NetEase for October expiration was extremely large across strike prices from 35 to 43 yesterday and with only 4 days until expiration. Call option volume for November expiration was very large in the out-of-the-money call options in the 40 to 43 range. December 39 and 40 call options also showed a lot of interest yesterday. Everything was not bullish as, there was significant interest in October, November and December put options, but not as much as in the call options.

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The Strike of Pain for NetEase is very bullish with the strike of pain at 44.00 for October. The Strike of Pain represents the strike where the stock options buyers will lose the most money and the stock option sellers will gain the most money at expiration.

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Even with bad news and its stock price taking a haircut, NetEase stock options activity looks bullish. Maybe the stock options activity is telling us NetEase is oversold at this price.

A covered call investing position for NetEase for November expiration looks attractive with a %if unchanged potential return of 6.7% and a %if assigned potential return of 9.8%. The timeframe for potentially realizing these returns is only 39 days. The call option to sell would be the November 40.00 with a ticker symbol of NGHKH.

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To enter the covered call investing position an investor would purchase the stocks in multiples of 100 shares and sell one call option for each 100 shares of stock purchased.

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PowerOptions’ sister company PowerOptionsApplied provides expert stock option trading recommendations. PowerOptionsApplied specializes in covered calls, naked puts and iron condor stock options strategy recommendations. PowerOptionsApplied provides a 30-day risk free trial of its service.

[tags] online game, advertising, wireless, China, gaming restrictions, World of Warcraft, Strike of Pain, ATVI, Activision Inc., NTES, Inc. ADR, SINA, Sina Corp., SOHU, Inc. [/tags]

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