Are you looking for growth with compelling value off and on the price chart? The search is officially over following an earnings report in Baidu (NASDAQ:BIDU) and a small bit of help from Google. But for bullish investors wanting to avoid a possible trade war with bears, a moderately bullish butterfly on BIDU stock is an option to consider. Let me explain.
China-based search engine and technology giant Baidu delivered a top notch report this past Tuesday night featuring solid double-digit growth, which narrowly topped the Street’s sales and profit expectations. But the results were trumped by an unwanted report Google’s parent company Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) is pursuing a censored search engine for the Chinese market.
The shoot first, ask questions later reaction sent BIDU stock down nearly 8% on the session. Yet as Mizuho Securities notes, a quick return back into China for Google due to the current political climate, won’t be easy. Furthermore, Google isn’t confirming the report and may have already missed the boat.
Bottom-line, the search business in China has matured faster than in the U.S. and it is less compelling financially, even if Google is able to re-enter the market following its 2010 exit after a public spat with the Chinese government over censorship policies. And now the bottom-line, top-line and squiggly price line on the stock chart all support the idea that it’s time to buy BIDU stock.
BIDU Stock Weekly Price Chart
If you would have asked this strategist’s technical view on BIDU stock in front of earnings, I would have said the chances of a breakout looked good. Following a breakout to all-time-highs nine months ago, shares of Baidu had spent their time in a volatile, choppy consolidation pattern on either side of the critical price level. Shares looked primed to move higher, but alas Mr. Market had something else in mind.
The reaction by investors to the Google report put the near-term kibosh on our anticipated bid and move to fresh highs in BIDU stock. But as the weekly chart shows, the sharp decline in shares has put Baidu into an attractive testing position of a 50% retracement level and up-channel support.
The search for investors looking to buy BIDU on weakness at a compelling spot on the price chart is over. However, I wouldn’t advise throwing caution into the wind. Shares of Baidu need to reaffirm the uptrend or risk breaking technical support and potentially becoming a good deal uglier, rather than valuable for bullish investors.
BIDU Stock Moderately Bullish Butterfly
For investors that believe an overreaction to Google has occurred, but wish to keep exposure limited to the current technical set up described above, an out-of-the-money bullish spread combination makes sense. One favored play right now is the September $240 / $260 / $280 call butterfly for $2.85 with shares at $230.46.
For just more than 1% share risk, this strategist controls a profit range in BIDU stock between $242.85 to $277.15 and back toward Baidu’s recent high near $284, established in May. The sweet spot at $260 could capture as much as $17.15 in profit if shares rallied the necessary 13% and landed on the strike at expiration. So far, so good, right? The real downside for a bullish trader using this strategy is if BIDU rallied above the butterfly structure.
At the end of the day, this butterfly is still a trading range play with a moderately bullish tilt. If Baidu is above $280 at expiration, the debit of $2.85 will be forfeited. But given the shorter time commitment to this position and with earnings out of the way, that’s an acceptable risk-adjusted return and a smarter way to get long BIDU stock.
Disclosure: 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.
