The New Year is fast approaching and the “fiscal cliff” crisis looks like it is far from being resolved. Volatility is beginning to escalate in the market but there are some strategies that can take advantage of this. Here is one example.
Baidu Inc. (NASDAQ:BIDU): Put Credit Spread
The trade: Sell January 85/90 Put Credit Spread (selling the January 90 put and buying the January 85 put) for 50 cents or better.
The strategy: The maximum potential profit for this trade is 50 cents if BIDU is trading above $90 at January expiration. The maximum loss is $4.50 ($5 – 50 cents) if BIDU is trading below $85 at January expiration. Breakeven is $89.50 at expiration based on a 50-cent credit.
The rationale: BIDU is often referred to as the “Google of China”. The search engine provider is a household name in the eastern hemisphere and has 73% of the Chinese market. That is all well and good but here is the real reason this trade idea looks good.
The stock had been in decline for several months and just recently broke its downtrend by setting a higher pivot high above the previous pivot high. This doesn’t guarantee that the stock is now in an uptrend, but for now the downtrend has been halted. The stock also has previous pivot lows (that can act as support) right around the $90 area. We need BIDU to stay above there to profit. It also has the weekly 200-day simple moving average above $90 which can also act as support for the stock. BIDU may not be heading much higher but it should also not be heading much lower either.
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