Today, I’d like to show you a trade idea on Baidu Inc (ADR) (NASDAQ:BIDU) — a stock that has made a recent move higher and is now counting on a potential support area to keep the stock from moving lower over the next several weeks.
The market has been volatile for weeks, but for the most part, stocks have been able to hold their own no matter what news has been released and move higher over the last couple of sessions.
As we head into the heart of quarterly earnings, there will be fewer opportunities to find stocks to trade not based on an earnings report. Baidu is not expected to announce until after February monthly expiration, which is Feb. 20. Recently, Chris Tyler wrote about what he liked about the stock and a potential option trade he liked.
Here is another option trade on BIDU that may be more suitable for an option trader that likes to trade simple spreads. It simply counts on a potential support area to keep shares from moving lower over the next several weeks.
How to Trade BIDU Stock
The trade: Sell the BIDU Feb $165/$170 put credit spread (selling the Feb $170 put and buying the $165 put) for 90 cents or better.
The strategy: The maximum potential profit for this trade is 90 cents if BIDU stock is trading at or above $170 at Feb expiration. The maximum loss is $4.10 ($5 – $0.90) if BIDU stock is trading at or below $165 at Feb expiration. Breakeven is $169.10 at expiration based on a 70-cent credit.
The rationale: Taking a look at a three-month daily chart of BIDU below, you can see that the stock broke out of a channel between about $160 and $170 from November through December. During that move higher, the stock moved through both the 50-day and 200-day simple moving averages.
In addition, that previous resistance at around $170 from the channel almost correlates to where the 50-day SMA is now trading.
For this trade idea to be successful, those areas of previous resistance now need to act as areas of potential support in case the stock decides to move lower once again. What also makes selling this put credit spread attractive from an options standpoint is the implied volatility of the options. The current 30-day IV is above the 30-day historical level, which means option premium may be a little expensive. That’s great for selling premium like in this trade idea.
Consider it to be a bearish sign if BIDU closes back below the moving averages.
John Kmiecik is the head options instructor for Market Taker Mentoring, and co-author of the e-book, 3 Secrets to Making Money in Any Market. Get your complimentary copy of his option trading e-book here. As of this writing, he did not hold a position in any of the aforementioned securities.
