The shares of Sohu.com (SOHU), China's third-largest search engine, are being hammered this morning, with the stock plunging more than 15% in the wake of a poorly received fourth-quarter earnings report. Specifically, Sohu.com posted an unexpected 39% drop in profit, with the company citing acquisition charges and eroding advertising and games sales. However, the shares' weakness has not dissuaded options traders from piling into SOHU calls.
Overall, SOHU call volume has swelled to nearly nine thousand contracts, versus put volume of merely 4.4 thousand contracts. The result is a bullishly skewed single-session put/call volume ratio of 0.39. In other words, options traders have favored calls over puts by nearly three-to-one so far in today's trading.
Drilling down on this activity reveals that the most popular call is the February 60 strike, where some 1,600 contracts have traded on open interest of 3,761 contracts. The next most active call is the March 55 strike, where another 1,600 contracts have traded on open interest of 185 contracts. While it would take additional data to confirm, I suspect (based on technicals that I will get to in a moment) that this activity represents options traders closing out front-month February calls in favor of back-month March calls.
On the put side, SOHU's February 50 strike has seen the most activity, with nearly 1,200 contracts changing hands on open interest of just 1,096. With volume arriving higher than open interest, we can speculate that new contracts are being initiated on the February 50 strike. What's more, these could be sell-to-open initiations given the stock's current technical backdrop.
Why do I suspect that today's options activity is bullish? Because SOHU's post-earnings plunge has halted near $53 – an area which is home to prior support/resistance as well as the stock's rising 50-day moving average. While retaking $55 could be troublesome for SOHU over the short-term – the area marks the stock's intraday high so far today – with solid technical support below the shares, it should be just a matter of time before the security reclaims this level.
As such, with support just below the stock, selling a February 50 put seems like a solid bet – especially since these options expire at the end of next week. At last check, the SOHU February 50 put was bid at $0.70, meaning that you could pocket $70 per contract sold as long as the stock closes north of $50 on February 17.
Now, losses on a sold put can be pretty steep, so more conservative traders may want to consider purchasing a February 47.50 put, which was last asked at $0.40. By purchasing a February 47.50 put in conjunction with a sold February 50 put, the trader limits his losses (in this case to a loss of $2.20 per pair of contracts) as well as his gains (the maximum profit would be $0.30, or $30 per pair of contracts).
