If investors are searching for a company with very promising prospects both off and on the price chart, look no further than China-based Baidu Inc (ADR) (NASDAQ:BIDU). But for bulls demanding a more authoritative price guarantee, a long bull call spread on BIDU stock in lieu of buying shares is the favored approach. Let me explain.
Plain and simple, BIDU stock is firing on all cylinders these days and worth investors’ attention. Following late April’s monster profit and revenue beat, the broad-based technology outfit proved growth is back following a couple years of regulatory headaches with the Chinese government regarding its staple internet search business.
What’s more, like Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL), Baidu is continuing its heavy investments into other secular growth markets ranging from artificial intelligence and mobile to autonomous automobiles and even the development of smart cities in China. This strategist believes growth is not only back, it’s looking very strong going forward — a view being reaffirmed on BIDU stock’s price chart in a very big way.
BIDU Stock Weekly Chart
The last time in I wrote about BIDU stock, the focus was on shares being “back in position” for bullish investors. And if timing is everything, the analysis was clearly early. Our optimistic forecast marked the most recent weekly closing high of $262.39 several weeks ago in mid-March. Nevertheless, Baidu is once again well-situated for higher prices.
Bottom line, shares of BIDU have continued to hold a loose consolidation base formed around the stock’s prior all-time high near $250. That type of technical activity is generally viewed as a positive as shares reset and remove any prior excesses.
Further, BIDU stock is also marginally above the well-watched prior high from 2014 while carving out a tight post-earnings, multiday contraction pattern. The takeaway is that the current small basing pattern has the right characteristics to act as a technical trigger for a momentum-style breakout to new highs from its very massive corrective base.
BIDU Stock Long Call Vertical Spread
As stated back in March, without any guarantees on the BIDU price chart, the options market can help bullish investors limit their exposure in the event they are “early” once again.
Reviewing the BIDU options board, one new favored spread combination is the July $260/$280 bull call spread. With shares at $253.90, the vertical is priced for $6.15. By positioning with a vertical, the trader reduces the premium of the long call by roughly 40% and limits risk to 2.4% of owning shares of Baidu.
At the same time, if the determined technical platform in BIDU stock cooperates and new highs are narrowly made over the next couple months, reaching above $280 at expiration offers a profit of $13.85 or return of 225%.
Personally, as this spread rests on shares breaking out shortly, I’d give serious consideration to exiting the position if the premium is cut in half. Over the next couple weeks that kind of drop in the price of the spread is only going to happen if BIDU falters or fails technically — and thus less reason to be feeling confident about holding today’s risk with the same expectations.
Investment accounts under Christopher Tyler’s management currently own positions in BIDU stock and its derivatives. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.
