The cost of bullish Tencent options have risen to the highest level in almost three years on optimism the mainland's biggest internet company will earn more profit from mobile messaging and games.
Calls with an exercise price 10 per cent above the shares cost 1.8 points more than puts 10 per cent below, data on three-month options shows. The gap was 2.03 points on November 7, the most since December 31, 2010.
Tencent shares posted the second-biggest gain on the Hang Seng Index this year, rising to a record HK$447.80 on October 21.
Tencent, which reports quarterly results today, is developing offerings for its WeChat mobile messaging service to profit as consumers spend more time on smartphones and tablets.
The shares might surge to HK$506 as mobile revenues increased Tencent's 2014 earnings, JPMorgan Chase analyst Alex Yao wrote in an October 27 note.
The company might start charging for WeChat, said Michael Liang, the chief investment officer at Foundation Asset Management (HK).
"The market may be speculating the company could charge a fee for it because it's free right now," Liang said. "The stock is overextended. So, if you want to continue to bet on the story, you probably want to sell the stock and buy options. That's a smart way to play it."
Tencent may report net income of 4.06 billion yuan (HK$5.16 billion) for the three months to September, according to analyst estimates. That compares with 3.22 billion yuan a year earlier.
The company is tapping into the sevenfold surge in online users since its 2004 initial public offering with games, e-commerce and the WeChat instant-messaging service. The number of people on the mainland accessing the internet through mobile devices rose 10 per cent to 464 million by the end of June from six months earlier, according to data from the China Internet Network Information Centre.
Tencent has expanded into e-commerce with platforms such as business-to-customer website Yixun.com and Paipai.com which links individual buyers and sellers. WeChat also allows users to pay for mobile-phone bills. Alibaba Group, the largest e-commerce company in China, is offering an instant-messaging app to compete against WeChat.