NetEase.com (NTES): Could it Reverse Higher?

Great wall of China Earlier this week, Standpoint Research upped its rating on NetEase.com NTES to a “buy” from a “hold,” maintaining its 12-month price target of $42. The Beijing-based NTES operates an online community and e-commerce services throughout mainland China. An analyst with the firm noted that “At 10x estimates for next year, the concerns regarding margins, regulations and competition are already priced in.”

From a technical perspective, NTES hasn’t behaved very bullishly of late. Since its late-September peak, the stock has backpedaled 36% and is below multiple simple moving averages, including the 50-day trendline. NTES recently rebounded off its 50-month trendline, however, so it is possible that selling has abated as Standpoint projects.

For investors who are looking to add option strategies to their trading arsenals, two hypothetical strategies on NTES – one bullish, one bearish – are described below. Remember these serve as examples, not recommendations. Consider your own risk/reward parameters and personal trading goals before executing any new trades.

Want to learn more about different options strategies or the OptionsHouse trading platform? Stop by our events page to review our schedule of free weekly webinars and sign up for one that interests you. Next week’s strategy webinar is a look at the risks and rewards of long puts.

*Prices given as of Tuesday’s close. NTES ended the day at $31, up three cents.

Bullish Option Strategy: Bull Call Spread

Traders with a bullish thesis could buy bull call spreads. The September 22.50/31 call spread is currently priced at $6.23 (selling the 31 strike, buying the 22.50 strike). The maximum a trader can lose is 100% of the debit paid, or $6.23, which would occur at expiration if NTES was trading below $22.50. The maximum potential gain of $2.27 is achieved if NTES is above the 31 strike when the options expire on September 17. Breakeven for this strategy is $28.73. As long as the shares are above this level at expiration, the spread will be profitable.

Profit/Loss of NetEase (NTES) bull call spread

Bearish Option Strategy: Bear Put Spread

Think NTES is likely to continue lower? The long-put strategy may be the way to go (and remember this strategy is our free webinar next Tuesday). The out-of-the-money December 27 put is currently offered at $2.25, which is the most an investor can lose if he holds the put all the way through expiration and NTES fails to decline. If NTES moves below the breakeven level of $24.75, gains are significant but theoretically capped at $24.75, as the stock cannot move any lower than zero.

Profit/Loss of NetEase (NTES) bear put spread