The last few months have been very volatile for Baidu Inc (ADR) (NASDAQ:BIDU) stock. It fell 15% during the February correction. It quickly recovered from that and then some, but then retested the lows in mid March.
Last week, BIDU spiked on a successful earnings report. So far it has been holding the spike. Follow through is important since this has been somewhat of an underwhelming earning season. Companies have beaten expectations, but investors have been hesitant to reward their stocks even when the earnings have been great.
From the valuation perspective, Baidu stock is not bloated, especially when you consider that this is a growth company. The problem with stocks like this is that investors are shy about giving much of a lead in stock prices without checking back to prior base lines.
Last July Baidu broke out sharply on earnings from $200 per share to current levels. It has since used the zone above $220 per share as support thereby creating a new level of consolidation. It is my experience that such zones become strong floors for higher prices to come. And therein lies the opportunity.
However, since we have so many macroeconomic headlines that are holding back the Bulls on Wall Street, I will use Baidu options where I can create a safety net for my risk.
I do believe that Baidu is headed higher overtime, but for the short-term I am more certain that recent support will hold. So today I sell risk into what others fear. This reduces my exposure since I have no out-of-pocket expenses.
Click to Enlarge If price goes against me and falls below my chosen support then I will own Baidu stock at a hefty discount from the current price. In this environment, I am certain that I will be able to navigate myself out of it for a decent profit in the long term.
BIDU is trading below Wall Street average price target so there is no sign of surprise downgrades to come. So bulls have room to reclaim the highs from 2014 and finally set them as the floor for the next level up.
Prices have been higher recently but it’s not always that bulls can stick the landing on the first try. Rallies have to consolidate so they would have better footing forward.
BIDU Stock Trade Ideas
The Trade: Sell the BIDU Sep $190 naked put and collect $1.75 to open. Here I have a 85% theoretical chance that I would retain maximum gains. But if the price falls below my strike then I own the shares and would suffer losses below $188.25.
Selling naked puts carries big risk especially for a momentum stock like this. For those who want to mitigate it, they can sell a spread instead.
The Alternate Trade: Sell the BIDU Sep $195/$190 credit put spread. The spread has the same odds but would deliver 10% yield on risk. Neither trade require a rally to profit.
The macroeconomic thesis is the driver of all conviction trades. So click here for a quick review of what’s driving this one and to get my free newsletter.
Learn how to generate income from options 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.