My last write up of Baidu Inc (ADR) (NASDAQ:BIDU) was a big win. I sold a January iron condor for $8 per contract in income and scalped shorter dated puts. Today, I think it’s time for another BIDU trade.
Click to Enlarge The online shopping trend, while it seems to have gone on for a lifetime, is still in the earlier part of its cycle, and it’s gaining momentum. As evidenced by Cyber Monday’s ludicrous results, more of us are turning toward convenient click-based shopping.
Amazon.com, Inc. (NASDAQ:AMZN) CEO Jeff Bezos saw this coming before most of us, and his competition paid a dear price. But while I enjoy a good AMZN trade, today I prefer a proxy trade with China’s online marketplaces.
I considered JD.Com Inc(ADR) (NASDAQ:JD) for today’s trade. But technically, BIDU stock shows more upside potential in its weekly chart. JD is much higher above its regression. Baidu, on the other hand, is gaining momentum in its approach to the mean. It also has recently bounced off a solid support zone.
How to Trade BIDU Stock From Here
Trade #1 – The Bet: Sell the BIDU Jan $150/$145 credit put spread for 65 cents per contract. If successful, this trade yields 14% on money risked. From here, I have an 11% buffer from current price, which translates into an 85% theoretical chance of success. Ideally, I need Baidu stock to stay above $150 through expiration.
Going long BIDU into January, I have to recognize two potential bearish threats:
- Technically, the stock must continue to defend the support zone.
- Potential seasonality issues.
So I could hedge this trade with a credit call spread, but with a delay. This means I would set the credit put spread now, then add the bearish trade after some upside move if at all.
Trade #2 – The Hedge (optional): Sell the BIDU Jan $190/$195 credit call spread for an additional 60 cents, or 13% potential yield. The price buffer is currently about 9%, which is less than ideal for a momentum stock like BIDU.
Instead of hedging with BIDU, I could sell a credit call spread in the PowerShares QQQ Trust, Series 1 (ETF) (NASDAQ:QQQ) or SPDR S&P Retail (ETF) (NYSEARCA:XRT) instead. This would be a matter of preference and environment of when and if I decide to set the hedge.
I am not required to hold trades through their expiration. I can close any of them for partial gains or losses.
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.
