NetEase.com (NASDAQ:
NTES) shares are falling after
the company announced first quarter EPS late yesterday and showed a decline in its first quarter profit, as the NTES fell victim to new changes in the Chinese tax laws, which increased their tax burden. 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 NTES.
After hitting a one-year low of $13.45 in August, the stock hit a one-year high of $25.70 earlier this month. This morning, NTES opened at $23.24. So far today the stock has hit a low of $22.02 and a high of $23.52. As of 11:30, NTES is trading at $22.95, down 1.10 (-4.6%). The chart for NTES looks bullish but slightly deteriorating.
For a bearish hedged play on this stock, I would consider a June
bear-call credit spread above the $25 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 4.2% return in four weeks as long as NTES is below $25 at June expiration. NetEase would have to rise by more than 9% before we would start to lose money. Learn more about this type of trade
here.
NTES hasn't been above $25 except for a few days in the past year and has shown resistance around $25.40 recently. This trade could be risky if the stock continues on its upward trend, but with their recent earnings announcement, it seems that is not likely.
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 NTES.
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