I am Buying Youku Tudou (YOKU) Put Options: Chinese Stocks in Focus

Youku Tudou Inc. (NYSE:YOKU) has my attention today as we continue with the series on trading the stock options of Chinese stocks. I started this series on Monday with coverage of SINA Corporation and yesterday was devoted to an exploration of Baidu call options. I mentioned Youku Tudou briefly in yesterday’s piece when I pointed out that the stock has underperformed Baidu in the last one year.

I would naturally have passed over the options of Youku Tudou without as much as a second glance considering its underperformance as I have mentioned earlier. Nonetheless, the stock caught my attention today with an interesting trading performance that I observed.

Shares of Youku Tudou are roaring straight out of the gate in today’s session. As at 9:55 AM EDT, the stock had gained an unexpected 2.13% to $15.47 per share. At that trading price, it leads the pace for Chinese stocks as Baidu was up 1.98%, SINA was up 1.62% and SOHU was up 1.22%.

Why is YOKU Rising Today?

The more appropriate question will be to ask why Chinese tech stocks are rising today, but I am yet to develop a fundamentally sound theory to explain the gains. Nonetheless, it appears that the shares of Youku Tudou are rising in anticipation of the fourth quarter (Q4 2014) results that the company is set to release tomorrow.

Youku Tudou with its market capitalization of $3.08B is the YouTube of China. The company is an Internet television company in the People’s Republic of China. The Company’s Youku and Tudou platforms enable users to search, view and share video content across multiple devices.

I think Today’s Rally is a Fluke

Investors are expecting Youku Tudou to deliver an impressive fourth quarter results tomorrow; hence, the buy action on the stock appears to be justified. However, I think that today’s rally is a contrarian move in the market because Youku Tudou does not show a fundamental or technical reason to suggest an earnings beat tomorrow.

Firstly, its performance in the last reported quarter (Q3 2014) was dismal as the company reported a 30% increase in revenue but earnings were flat with a loss of $0.18. More so, the company’s operating expenses and its sales & marketing costs have increased by 44% and 67% to suggest that the company’s profit margin is in trouble.

Secondly, Youku Tudou has been unconventionally late in making an announcement about when it will release fourth quarYOter results. Most companies announce their earnings release, weeks (sometimes months) in advance of the date.

However, Youku Tudou announced the upcoming release of its earnings on March 17, a mere two days to when the results will be released. When earnings are released on such short notice, during holidays, over the weekend or at strange hours, it suggests that the company is trying to catch investors unawares in the hopes that they will not be able to scrutinize the earnings as soon as it is released.

How to Trade YOKU Options

Youku Tudou looks promising in the long term if the company can successfully weather the storm that has besotted it in the four years since its IPO. More so, Alibaba (BABA) is not likely to allow its $1.22B investment in Youku Tudou waste away; hence, a strong possibility exists that Youku Tudou might be an acquisition target going forward.

However, in the short term, the quality of the stock’s financials raises some serious concerns about its viability as a standalone company: hence, I recommend buying YOKU put options. You should consider buying the YOKU Jun 2015 16.000 put (YOKU150619P00016000) at an asking price of $1.72.

— Daily Option Alerts

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