Investor sentiment for Chinese stocks has recently taken a dramatic bullish turn. Just a few weeks ago, investment managers were worried that the economic picture for China’s growth was significantly slowing. But a bevy of strong economic reports helped to boost confidence that the country’s growth opportunities are still on track.
In particular, China’s manufacturing data came in ahead of expectations for August, exports were particularly strong, and auto purchases surprised to the upside. Core inflation measures also came in below expectations, which opens the door for more Chinese stimulus measures to further boost economic growth.
Chinese Internet stocks look particularly attractive right now as the urbanization of China continues. China boasts an online population of more than 550 million (more than double that of the United States), and the number should continue to rise as a larger portion of the country’s citizens moves into urban areas.
Of this online population, an estimated 75% of users have access through mobile devices. Chinese Internet companies are largely focusing on mobile users as this represents strong growth opportunities and new areas for profitability.
Youku Tudou — Streaming Video for China
Youku Tudou Inc (ADR) (NYSE:YOKU) manages a site that offers streaming video for the online Chinese population. Shares have been building a multi-year basing pattern ever since the stock fell sharply in 2011.
Over the past few years, Youku Tudou Inc (ADR) (NYSE:YOKU) has reported negative earnings as the company has been investing in growth opportunities. After acquiring its primary competitor, Tudou (hence the name Youku Tudou), the company is now on a path toward transitioning into a profitable company.
Analysts are split on just how much Youku Tudou Inc (ADR) (NYSE:YOKU) could earn next year, but the consensus is $0.76 per share. Investors are bidding the stock higher as it appears that the company is finally in a position to begin generating profits.
YOKU Put Selling Strategy
Today, I want us to capture a significant income payment by selling puts on this Chinese growth play.
With the stock currently trading near $27 per share, I recommend you sell the Youku Tudou Inc (ADR) (NYSE:YOKU) Oct 25 Puts near $1. Selling these put contracts obligates us to buy YOKU at $25 should the stock drop below this level before these options expire on Oct. 18.
Remember, each put option controls 100 shares of stock, so we will be receiving $100 for every put contract we sell, and we will have the obligation to buy 100 shares of stock at $25 if the puts are assigned. This means we will need to set aside $2,500 in our account in case the stock trades lower. Of course, we will receive $100 from selling the puts, so we will only be obligated to use $2,400 of our own capital.
Assuming the stock stays above $25 through Oct. 18, we should get to keep the $100 as our profit for the trade. Based on the $2,400 that we set aside, this represents a 4.2% rate of return over a 31-day period. If we could repeat a similar trade every 31 days, we could generate a 49% return per year.