by John Kmiecik | October 21, 2013 8:45 am
Many times in life, there leaders and there are followers — and usually, it’s better to be the leader than the follower. However, this trade idea can profit if one particular company — Chinese Internet firm Baidu (BIDU) — becomes a follower.
The trade: Sell the BIDU Oct 25 155/160 Put Credit Spread (selling the Oct 25 160 put and buying the Oct 25 155 put) for 70 cents or better.
The strategy: The maximum potential profit for this trade is 70 cents if BIDU is trading above $160 at Oct. 25 expiration. The maximum loss is $4.30 ($5 – $0.70) if Baidu stock is trading below $155 at October expiration. Breakeven is $159.30 at expiration based on a credit of 70 cents.
The rationale: Baidu provides Chinese-language Internet search services and is sometimes referred to as the “Chinese Google.” If it is the Chinese Google (GOOG), then the future for Baidu stock looks bright based on Google’s earnings announcement Thursday, after which it topped the $1,000 barrier on an upbeat report. BIDU, which is expected to report Oct. 29, has made a successful transition from PC to mobile, which prompted Citigroup to raise its price target to $175.
Even though this trade expires before the expected earnings, BIDU might continue to rally on the heels of Google.
Click to Enlarge Baidu stock gapped higher Friday, then proceeded to break a resistance level at around $160 and set an all-time high. The fact that previous resistance often will act as support once it has been violated is a great attribute of this trade considering we need BIDU to finish above $160 for maximum profit. Implied volatility also is higher than historical volatility largely thanks to the looming earnings report.
Selling a credit spread that might be a little overpriced is never a bad thing. If Baidu stock can ride Google’s wave higher ahead of its earnings, you will be glad you searched out this trade idea.
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.
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