Are you searching for the next big breakout? Maybe instead, start by looking for a lower-risk, simple pullback. If you’re in agreement, then Baidu Inc (ADR) (NASDAQ:BIDU) is worth a peek, as well as looking at a slightly more complex, but well-suited, limited-risk spread using BIDU stock options. Let me explain.
So far 2017 is working out a bit better for China-based tech giant Baidu and its investors than in recent years.
BIDU stock is up 7% year-to-date. This gain stands in stark contrast to 2016’s 13% loss and and the S&P 500’s gain of roughly 9.50% over the same period.
Not only that, BIDU is also demonstrating relative strength in 2017. It’s year-to-date performance trumps the S&P 500’s increase of 1.50%, the Nasdaq Composite’s gain of 3.4% and iShares FTSE/Xinhua China 25 Index (ETF) (NYSEARCA:FXI) jump of 5%.
Will the good times continue? Our view remains optimistic and in keeping with a bit of bullish analysis on BIDU out-the-gate on Jan. 4. In a nutshell, the expectation is BIDU stock will find investor support from favorable currency translation, increasing sales on the heels of a regulatory rough patch and investments in new markets for the search giant beginning to pay off.
And if you believe the fore-mentioned price action and relative strength can portend better conditions off the chart, BIDU stock is looking supportive of a more bullish 2017.
BIDU Stock Weekly Chart
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As the weekly view shows, shares of Baidu remain in a fairly significant corrective symmetrical triangle that is anticipated to be broken to the upside. The expectation is for that to happen sooner, rather than later, as price action nears the pattern’s apex.
Were such a reaction to occur, it would put BIDU on its way toward establishing a new bullish uptrend and potential outperformance in 2017 following a lengthy period of flat returns for investors.
Currently (and what the weekly BIDU chart fails to show), a nice-looking pullback is on the daily time frame. This strategist views this favorably, as the price action also appears to be finding support above the 200-day simple moving average.
BIDU Short Call (Bullish) Condor Spread
Last time we discussed the use of a modified collar spread, which is working quite nicely so far as BIDU stock has rallied the past couple weeks. For traders looking for a fresh idea to get long BIDU with the current pullback in mind and a slightly shorter-term mindset, the Feb $180/$185/$190/$195 short call condor is attractive.
This spread combines a $180/$185 bull call spread with a $190/$195 bear call spread and trades for $1 with shares of Baidu at $176.54. The trader’s max risk is the debit and is lost if BIDU is below $180 or above $195 at expiration.
To breakeven, the trader needs BIDU to rally to $181, or about 2.50%. The max profit of $4 is realized at expiration if shares are between $185 and $190. Profits then begin to drop dollar-for-dollar until $195, at which point $1 would be at risk of being lost.
While being a BIDU bull (and facing a potential loss on an upside move in the shares you want to see rally) can be a tough mental proposition, fret not. For one, realize this spread can make 400% if BIDU rallies by roughly 5% to 7.5%.
This short condor also allows a full month of positioning to realize a decent, but not exactly outlandish upside move in need of stock catalyst. As well, as this bullish BIDU trader doesn’t need to worry about an earnings gap — which could always wreak havoc on the position — this spread has some nice legs to it in more than one way.
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.
