In the old days, if you wanted information, you had to either ask someone or look it up in an encyclopedia. Now, companies like Google (GOOG) and Baidu (BIDU) help answer the world’s questions.
Here’s a trade idea on the latter, which makes finding info in China a whole lot easier:
Baidu (BIDU — $138.98): Call Debit Spread
The trade: Buy the Sep 140/145 Bull Call Spread (buying the Sep 140 call and selling the Sep 145 call) for $1.95 or less.
The strategy: The maximum potential profit for this trade is $3.05 ($5 – $1.95) if BIDU is trading above $145 at September expiration. The maximum loss is $1.95 (or what was paid for the spread) if BIDU is trading below $140 at September expiration. Breakeven is $141.95 at expiration based on a cost of $1.95.
The rationale: Baidu provides Chinese-language internet search services. It is often referred to as the “Chinese Google.” In fact, there are a lot of similarities between the two companies. Both companies have had increases in revenue and profit over the last several years. Baidu has still been able to increase its revenue despite several increased costs like obtaining content and bandwidth. BIDU has a projected earnings growth rate of more than 20% annually over the next half-decade.
Click to Enlarge Taking a look at the chart, Baidu stock has really been on a tear, moving higher since the beginning of July, when it convincingly broke through its daily 200-simple moving average.
For most of August, however, the stock has been basing between about $135 and $140. BIDU has attempted to break through that $140 resistance a couple of times and has failed. But even after those failed attempts, Baidu has not pulled back much and has now formed a bullish base.
A call debit spread trade idea will still be able to generate a decent profit as compared to a credit spread if the stock does finally move higher, but still will lower the overall risk as well.
As of this writing, John Kmiecik did not hold a position in any of the aforementioned securities. Get a free trial of John’s live options trading room here.