Baidu Inc. (ADR) (BIDU) Is Headed for a Big Move

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Baidu Inc (ADR) (BIDU) has had a rough 2016, down over 14%. The 12-month run rate is even worse at -17%.

Baidu Inc. (ADR) (BIDU) Is Headed for a Big Move

Fundamentally, BIDU has not deteriorated much. It is, however, battling several negative headlines calling into questions the company’s practices.

Only time will tell how this plays out.

Meanwhile, there is no denying that the company delivers profits, so I don’t want to short it on a fundamental basis. Instead, I do foresee price action that I can trade.

Coming Movement in BIDU Stock

Technically, BIDU stock’s range is tightening. We see short-term lower highs knocking on the floorboards. Often enough, this is followed by a sizeable move.

BIDU Stock Chart
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The direction of BIDU’s move could be either way. Either the floorboard will hold and serve as a bounce level or the board breaks and opens a trap door. I estimate the move to be as big as 5% to 7% in either direction.

My global market thesis is bearish at these levels. We have deteriorating fundamentals in spite of central bank easing — all this while equity markets are near all-time highs.

I also believe that the bond markets being at all-time highs makes for a vulnerable equity market. So, I want to bet the downside scenario for BIDU stock.

Instead of trading Baidu the stock, I will resort to the options market, where I can fashion hundreds of trades to fit my thesis. I will buy puts to capture the potential move lower, then I will sell premium to reduce my out-of-pocket expense.

Timing is crucial to my success. BIDU reports in late July, so I want to buy the early August puts. Then I will step out longer in time and much farther from the current price for the short strangle part of the pair trade.

Baidu Trade Ideas

Trade No. 1: Buy the BIDU Aug 5 $155 put. This is a bearish trade for which I pay $6 per contract. This is my maximum loss. I need BIDU stock to fall through $155 per share by August 5, so that my put increases in value fast.

Trade No. 2: Sell BIDU Jan $120 put and $200 call. This is a neutral trade for which I collect $8.55 per contract. Selling naked puts is dangerous and I only do it if I am willing and able to own BIDU at $120 per share.

Selling naked calls is even riskier, as I could become short the stock at $200 per share, leaving me exposed to unlimited losses.

Taking both trades means that I collect a net premium of about $2 per contract. I stand to gain more if BIDU stock falls through $155 per share by August 5. But I need the stock to stay between $120 and $200 per share through 2016. If Baidu goes nowhere, then I keep the $2 per contract I collected as pure profit.

Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @racernic and stocktwits at @racernic.

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Nicolas Chahine is the managing director of SellSpreads.com.


Article printed from InvestorPlace Media, https://investorplace.com/2016/07/bidu-stock-move-baidu-stock/.

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