Baidu Inc (ADR) (NASDAQ:BIDU) acts like a momentum stock so when it moves it can be impressive. The company seems to have solid fundamentals and continues to execute without major flubs. While BIDU stock is not cheap from a price-earnings perspective, the growth rate justifies the higher valuation for now.
Technically, BIDU stock range has tightened to the point that makes a big move highly likely. I consider it energy building up that needs to resolve itself in a big way. So a sizeable move is definitely coming and today I want to share a setup that could capture it for no out-of-pocket risk.
Early March, I shared a similar set up to go long BIDU for free and the trade paid quickly and without much uncertainty. So today, with profits in hand, I want to repeat performance on a longer timeframe. The idea is to again sell risk below proven long-term support levels and use the proceeds to invest in a spread that would capture any upside move in BIDU through May.
The Bet: Buy BIDU May $180/$185 debit call spread for $2 per contract. This is a bullish trade that needs the stock to rally past my spread, so I can have a chance at a double. I chose to stay close to current price so I only have to guess direction not size of move. To lower my out-of-pocket expense, I will sell risk below proven support to generate income.
The Bank: Sell BIDU Sept $145 put and collect $2.50 to open. This is a bullish trade with a 90% theoretical chance of success. If BIDU falls below my strike, however, I am committed to owning it. Anything below $142.50 per share would accrue losses for me.
By taking both trades I would be getting paid to be long BIDU. As long as it doesn’t fall below $145 by mid-September, any premium I recover from selling the debit calls would be pure profit.
Selling naked options is risky so to make it milder I can change the bank trade to be a credit put spread instead.
The Alternate Bank: Sell the BIDU stock Sept $145/$140 credit put spread which also has a 90% theoretical chance of success to yield 12% on risk. The sold spread offers the certainty of finite risk versus that of open ended risk by selling the naked puts.
Either case, I am leveraging what has been support to capture upside potential.
Learn options as easy as 1-2-3 in a personal 1on1 webinar 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.