Baidu Inc (ADR) (NASDAQ:BIDU) shares have been falling for the last two trading days on headlines. The company announced that its COO would be leaving and the stock also caught an analyst downgrade. This has been a proven winner, and I expect this malaise to pass. In a rising stock market, BIDU stock will be fine.
Having said that, Baidu is a momentum stock, so it runs fast in either direction. This often causes most traders to avoid the shares. As it falls, it appears that it is headed into an abyss with no end in sight, so I use options, where I can slow the action down and create a moat around my risk.
Click to Enlarge Fundamentally, BIDU is a high-beta stock that is on solid footing. It is priced competitively among its peers. It trades at similar price-to-earnings ratio as Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) and Facebook, Inc. (NASDAQ:FB). So far, management has been executing on plans with no major mistakes.
Last year was a pivotal year for Baidu stock as management emphatically made the commitment for better things to come — and they delivered. Results have been above expectations and Wall Street believed them. This morning’s swoon will pas and buyers will come back into the stock.
Timing is the tricky part but since I use options, I don’t worry too much about imperfect entry points. Although I am unsure as to exactly when the bounce will come, I am very certain that BIDU support will hold in 2018.
So, I like to sell fear into value. This morning there is nondescript fear manifestating in the stock on a green market day. BIDU put premiums are elevated so the goal is to profit from unreasonable levels of fear in the stock.
Technically, this morning’s dip is approaching a pivot zone. Below $240 served as a breakout neckline last September, and often enough those become forward support. In this case they have been support with a few pokes below, but bulls have so far prevailed.
There is also an open gap just below that could carry BIDU to $238 per share, but that still would not be a deal breaker for me. This morning, equities are rallying on the news that cooler heads prevailed with the U.S. and China and it looks like the tariff war is unlikely to happen. BIDU should be rallying but instead is under pressure, perhaps more from the Credit Suisse downgrade than the COO leaving. Regardless, these are transient negative catalysts that will soon pass.
Dips in quality stocks like BIDU are opportunities for long trades. One analyst’s opinion is another trader’s opportunity.
BIDU Stock Trade Ideas
The Trade: Sell the BIDU Sep $190 naked put and collect $3.50 to open. Here I have a 88% theoretical chance that I would retain maximum gains, but if the price falls below my strike then I accrue losses below $186.50.
Selling naked puts carries big risk, especially for a momentum stock like BIDU. For those who want to mitigate it, they can sell a spread instead.
The Alternate Trade: Sell the BIDU Sep $190/$185 bull put spread, where I have the same odds of winning. Then the spread would yield 12% on risk.
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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.
