BIDU – Cash In on Baidu’s Surge With This Credit Spread

by John Kmiecik | January 3, 2014 9:12 am

Our calendars have hit 2014, and the market is ready to begin again. It is probably safe to say that most analysts didn’t predict the gains that the market achieved last year. But savvy traders can capitalize on that strength with smart options plays. Here’s a trade idea to get you started in the right direction, with Chinese Internet star Baidu (BIDU[1]).

Baidu (BIDU): Put Credit Spread

The trade: Sell the January 165/170 Put Credit Spread (selling the January 170 put and buying the January 165 put) for 60 cents or better.

The strategy: The maximum potential profit for this trade is 60 cents if BIDU stock is trading above $170 at January expiration. The maximum loss is $4.45 ($5 – $0.60) if BIDU is trading below $165 at January expiration. Breakeven is $169.40 at expiration based on a credit of 60 cents.

The rationale: As mentioned on previous trade ideas for Baidu, the company is known as the Chinese “Google”. In the last six months, the stock has gone from just above $90 to its current levels around $180.

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Over the last year, the company has made a couple of acquisitions which have enabled the company to grow. In May, the company acquired a streaming video service and just a couple of months later it purchased a mobile apps marketplace operator. Both of these moves have led to BIDU stock rising in value and a couple of gaps higher after earnings were reported. It looks like investors have liked what they have seen.

Taking a look at the chart, the $170 and $180 areas have played critical roles of support and resistance for the stock. The $170 area acted as resistance for BIDU stock on several occasions before it moved above the area, where it then acted as support. BIDU stock is currently testing a previous pivot high from back in December around $180 that the stock could break and help this put spread expire worthless. If it stalls or moves lower at $180, then potential support at $170 needs to work to keep this trade in positive territory. If you are searching for the next trade idea, BIDU stock should be at the top of the list!

As of this writing, John Kmiecik did not hold a position in any of the aforementioned securities. Get a free trial of John’s live options trading room here[2].

  1. BIDU:
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