Baidu Inc (ADR) (NASDAQ:BIDU) reported earnings last night and BIDU stock is soaring on the news. This is an opportunity to go long, especially after this market-wide flash correction that we’ve just had.
Coming into earnings, BIDU stock was down 3.5% year-to-date, but up 22% in 12 months, so the bulls were still in charge of it. However, it and Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) had lagged the likes of Alibaba Group Holding Ltd (NASDAQ:BABA) and Apple Inc. (NASDAQ:AAPL), so there was potential room to run.
This morning BIDU is making some of it up. Management reported earnings and BIDU stock is soaring 5%. This is momentum I want to ride for profits into the next few months.
Fundamentally, Baidu is cheap. From a price-to-earnings perspective, it is half as expensive as GOOGL. Although it has had a few issues and it is more leveraged than Alphabet, it still is a worthy bet on value and growth.
The company beat the top and bottom lines, so things are going better than planned for them. And as long as the stock market in general holds up this should continue into next quarter.
How to Trade BIDU Stock
Technically, Baidu stock fell into a pivot zone that had served as a springboard last July for a massive rally, so they have since priced most of it out. Pivot points usually provide support on the way down. Neither bulls nor bears would be willing to let it go without a fight and that causes a price congestion.
Bulls can still use it as forward support for a reload of last year’s rally and therein lies my opportunity. Usually I would buy BIDU shares or BIDU call options here, but since the CBOE Volatility Index (INDEXCBOE:VIX) is so high, I will use this opportunity to sell downside risk and generate income from nothing.
Wall Street analysts agree with me since even after this morning’s spike, BIDU stock would still be trading below the average price target there. So owning BIDU stock at a discount in this economic environment is not likely to be a mistake.
The Trade: Sell the BIDU Jun $190 put and collect $3.25-per-contract to open. I have a 85% theoretical certainty, so that I retain maximum gains. Otherwise, I will accumulate losses below $186.75.
Selling naked puts carries big risk, especially for a stock as perceived as frothy as BIDU. For those who want to mitigate it, they can sell a spread instead.
The Alternate Trade: Sell the BIDU Jun $195/$190 bull put spread, which has about the same odds of winning and would yield 15% on risk. Compare this with risking $239-per-share here and without any room for error except a rally profit.
Ultimately, investing in stocks is fraught with danger, so I never risk more than I am willing to lose.
Get my newsletter for free 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 as @racernic on twitter and stocktwits.