Baidu.com (BIDU) in trouble over possible censorship

Baidu.com (NASDAQ: BIDU - option chain) shares are diving today after the Wall Street Journal reported that speculation is rampant in China that the internet-search company accepted payments from dairy companies to keep negative items from appearing in its search results. BIDU admits that several dairy companies had approached the company, but says it refused all offers to screen negative news. If you think this stock won't be rising too far in the coming months, then it could be a good time to look at a bearish hedged play on BIDU.

This morning, BIDU opened at $280.50. So far today the stock has hit a low of $201.15 and a high of $311.30. As of 1:05, BIDU is trading at $293.90, down $11.35 (-3.7%). The chart for BIDU looks neutral and S&P gives BIDU a 3 STARS (out of 5) hold ranking.

For a bearish hedged play on this stock, I would consider an October bear-call credit spread above the $360 range. A bear-call credit spread is an options position that combines the purchase and sale of call options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make a 5.3% return in 4 weeks as long as BIDU is below $360 at October expiration. Baidu would have to rise by more than 23% before we would start to lose money. Learn more about this type of trade here.

BIDU hasn't been above $360 at since May and has shown resistance around $325 recently.

Brent Archer is an options analyst and writer at Investors Observer.

DISCLOSURE: Mr. Archer owns and/or controls diversified portfolios of long and short stock and option positions that may include holdings in companies he writes about. At publication time, Brent neither owns nor controls positions in BIDU.