Baidu Inc (ADR) (NASDAQ:BIDU) is a momentum stock, which makes trading it the traditional way require near-perfect timing. So I use options to reload long at these levels even when it’s not an obvious entry point.
Fundamentally, BIDU stock is not a screaming bargain especially considering that I can buy Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) for a smaller price-to-earnings ratio. But compare it to say Amazon.com, Inc. (NASDAQ:AMZN) or Tesla Inc (NASDAQ:TSLA) and it would seem like chump-change minus the overblown expectations. Unlike with many momentum stocks, analysts have realistic expectations of BIDU. This minimizes the risk of surprise downgrades.
Click to Enlarge Technically, Baidu stock is nearing an interesting point. The range has been tightening. It has been setting higher lows knocking on a resistance band around $185. If the bulls can break through the resistance, they can shoot higher and retest the next level, which is $200-plus.
Momentum stocks like BIDU don’t give us many opportunities to grab a move before it happens, so I want to get long for free before it’s too late.
But still I don’t like chasing prices, so instead of buying the shares and hoping it could rally, I will sell downside puts to generate income out of thin air. This is something that I’ve done several times. Here is an example where the trade delivered profits for free and with zero out-of-pocket expense.
The trick is to find support levels that are solid enough to hold through the next tizzy should it come.
BIDU Stock Trade Idea
The Bet: Sell the BIDU Dec $145 put and collect $2.30 per contract to open. This is a bullish trade which has a 90% theoretical chance of success. If the price stays above my strike then I retain my premium for maximum gains. Otherwise I will have to own the shares and accrue losses below $142.70.
The Juice (Optional): Buy the BIDU Aug $185/$190 debit call spread, where I have a chance to double my money if price rallies through my spread in the next two months. This spread would capture the upcoming earnings event, which could serve as a perfect catalyst for bulls to rally.
By taking both trades, I would then be long BIDU stock for free. As long as the price stays above my sold put, then any premium I recapture from closing my calls would be pure profit since my base is zero. Should price fall through my puts then I would be long BIDU stock but at a 20% discount from current price.
If I don’t want to own the shares then I can sell a credit put spread instead of naked puts. The spread offers limited risk, which is more appealing to more conservative investment palettes. Nevertheless, investing is fraught with uncertainty so I should never risk more than I am able to lose.
Learn how to generate income from options here. 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.
