To say that iQiyi, Inc. (NASDAQ:IQ) has been one of the best-performing stocks over the past few months is an understatement. Since coming public in late March at $18 per share, IQ stock has now risen 140% in less than three months. Like all momentum based stocks, it is impossible to pinpoint exactly how high IQ can climb before reality sets in. Given the recent scorching price action, however, I feel that IQ stock is fast approaching a moment of reckoning.
The IPO for iQiyi was the largest Chinese-based issuance since Alibaba Group Holding Ltd (NYSE:BABA). IQ was a spinoff of parent company Baidu Inc (ADR) (NASDAQ:BIDU) and is sometimes called the Netflix of China. Like many newer companies, IQ is booking hefty losses as it goes after market share. The company showed a loss of nearly $600 million dollars in 2017. I get that it is all about the future and the belief with IQ stock, but that belief begins to get less believable as the price continues to soar.
Click to EnlargeIt is somewhat difficult to use traditional technical analysis given that IQ stock has less than three months of data to analyze. A quick look at the chart, however, and it becomes readily apparent that the stock has gone parabolic.
After making recent lows in early May at the $16 level, IQ stock has ripped higher by 170% over the past 30 trading days. The nine-day RSI is now at an astronomical 94 reading. Shares are up over 50% in just the past two weeks. IQ stock is definitely getting too hot to handle.
Implied volatility (IV) is now at the highest levels for IQ options in their brief history, with readings now over 100%. This means that option prices are extremely expensive and definitely favors option selling strategies when constructing trades. So to position for the red-hot rally in IQ stock to stall out, a bearish call credit spread makes probabilistic sense.
IQ Stock Trade Idea
Buy IQ July $60 calls and sell IQ July $55 calls for a 65-cent net credit or better.
Maximum gain on the trade is $65 per spread with maximum risk of $435 per spread. Return on risk is 14.94%. The short $55 strike price provides a 25% upside cushion to the $43.93 closing price of IQ stock.
Tim may hold some of the aforementioned securities in one or more of his newsletters. Anyone interested in finding out more about Tim and his option-based strategies can go to https://marketfy.com/item/options-and-volatility/.
