Fireworks have descended on Qihoo 360 (QIHU).
The popular Chinese stock has seen its volatility skyrocket over the past two trading sessions with prices gyrating wildly. The high flier was up as much as 20% since Friday’s open before finally succumbing to gravity on Monday.
With QIHU stock square in the sights of volatility junkies and momentum traders you might be wondering if there’s a trade to be had for the more, shall we say, sane among us.
Let’s head to the charts to see what kind of opportunity has been uncovered by the recent turmoil.
The recent QIHU pop has finished off the right shoulder of what could be an inverted head-and-shoulders pattern. This bottoming formation crops up near the end of a downtrend, revealing a gradual shift in the balance of power from sellers to buyers.
At its current perch near $61, QIHU stock is wrestling with the neckline of the pattern. A successful break above $61.50 would both complete and confirm the head-and-shoulders formation.
Coincidentally, the declining 200-day moving average is also coming into play here. A strong breach of the neckline would also vault QIHU stock above this pivotal long-term moving average, further improving its technical posture.
QIHU Bull Put Spreads Beckon
Not surprisingly, the uptick in price movement has boosted option premiums along with it. The implied volatility rank for QIHU options has returned to rich levels at 54%, making short premium plays more attractive here.
Look for QIHU to consolidate in the $63 area of the neckline before heading higher. Some sideways action will help digest the recent rally and set the stage for its next advance.
Once the stock finally does break out, consider selling bull put spreads to profit.
Sell the Jul $52.50/$47.50 put spread for around 65 cents. The reward is limited to the initial 65-cent credit and will be capture as long as QIHU stock remains above $52.50 by July expiration.
The maximum risk is limited to the distance between strikes minus the net credit, or $4.35, and will be lost if QIHU tumbles below $47.50.
At the time of this writing Tyler Craig had no positions on any of the aforementioned securities.
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