What could possibly go wrong or right from here? One stock which may hold a clue is Baidu Inc (ADR) (NASDAQ:BIDU). And for traders, limited and reduced risk, “dueling” vertical spreads in Baidu are looking like an opportunistic way to position.
Judging by the S&P 500 and Dow Jones Industrials, “risk-on” may appear universal. But markets beyond stateside borders and listed ADR’s like Baidu stock aren’t behaving nearly as convinced and care-free since investors decided Brexit could be swept under the proverbial carpet.
Chalk it up to “TINA” or “there is no alternative.”
One of Wall Street’s more popular buzzwords has been bandied about in recent weeks to justify the U.S. market rallying to all-time highs at the expense of markets like Europe and China and, as a result, stocks such as BIDU.
Don’t get me wrong, those markets are up also. There is however, a big difference in those animal spirits. As of Wednesday night, China-based search giant Baidu has rallied just over 5% since the June 29 low and the immediate aftermath of the Brexit decision.
Not only is Baidu’s stock gain small potatoes compared to the S&P 500’s 8% gain that’s catapulted the index to all-time-highs, but with shares still off 30% from its own highs set in 2014 and sitting near 2011’s prior all-time-highs — clearly something has to give.
As much as my internal dialogue tells me the TINA rationalization is bound to end poorly for all equities, near and far, as some other inconceivable (not) bearish catalyst unfolds — I’d rather be open to the possibility of profiting from an explosive move in shares of Baidu.
Let me explain.
BIDU Stock Monthly Chart
Technically and when looking at the Baidu monthly chart, the big picture shows a stock that’s corrected as part of a classic uptrend pattern.
Backing the bullish view for BIDU stock, shares have quieted down into a triangular consolidation that’s now holding key 38% and 50% Fibonacci retracement levels from 2013 and 2009, as well prior highs set in 2011.
However, the coast is not entirely clear for bullish Baidu investors either.
Alternatively and for bearishly inclined traders, relative weakness, a recently signaled Death Cross and bearish alignment of moving averages on the daily price chart of Baidu (not shown) don’t bode well for bulls.
Supporting this technical concern, mostly weak-looking stochastics and a modest daily chart bear flag that’s already breached the larger triangle pattern are decent warnings of forthcoming technical weakness in BIDU.
Baidu (Volatility) Vertical Spreads Strategy
With earnings on July 25, Baidu has a near-term catalyst worthy of improving one of the described and competing technical outlooks in a significant way.
Premiums aren’t ridiculously expensive, but in reviewing Baidu’s options, one idea to position with limited and lesser Greek risks — and on the expectation of a forthcoming decent-size move — is to purchase dueling or competing out-of-the-money verticals, i.e. a bull call spread and bear put spread.
The weeklys July 29 $170 / $175 bull call spread combined with the weeklys July 29 $160 / $155 bear put spread trades for $3.50 mid-market. Risk is limited to the purchase price and amounts to a total loss if Baidu remains between $160 and $170 at expiration.
The upside and downside is if Baidu rallies or drops by a bit more than 5% from current levels near $165.50, this somewhat unorthodox play on BIDU volatility will return $1.50, or nearly 43%, in less than two weeks.
Bottom line, with Baidu’s fairly strong track record of making big price moves following earnings, being fairly split on price direction and a strategy which minimizes risk for traders, this Baidu position may be one to consider for aggressive, self-directed options traders.
Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.
