China-based internet search outfit has been removed from the prying eyes of many growth strategists in recent months, but that could soon be changing. Bucking a weak tape Thursday, shares of Baidu (BIDU) were up about 2.00% in the start of the second half of trade.
Technically, the price thrust today has been accompanied by strong above-average volume on a breakout attempt from a flat base of five to six weeks less than 10% in width. With shares roughly 1% above pattern resistance, the action also has shares moving above its 62% retracement level tied to its prior all-time-highs set in late July to its late September corrective lows.
With strong overall fundamentals and a recent earnings beat, Thursday’s first stage base looks to represent a fairly decent opportunity for bulls to participate in a name that’s already gone about the business of profit-taking as compared to the broader market. At the same time though, in appreciating the majority of stocks follow the broader averages which look extended and ready for some March Madness game play, our strategy of choice with Baidu would be a bull call spread.
The reality in making this type of bullish play in a market prone to some profit-taking, is any potential upside gains could be more difficult to come by and more limited than otherwise. Thus and in our opinion, it makes additional sense to “sell a little something” i.e. some premium, in James Cramer’s sole play on China, while buying abull with a bit more security not found in owning just stock alone.
Figure 1: Baidu (BIDU) Weekly
Looking at Baidu’s option board, the name sports strong liquidity characteristics sufficient for two and even some three-legged spreads. With the likes of a call or put vertical using surrounding money strikes, traders are also more likely to enjoy the immediate benefit of being able to split the market and start a position for or very close to fair value. Based on Baidu’s heaviest and mostly evenly-traded volume, it appears this type idea might be a popular one in the April 140, 145 and 150 calls.
One combination, the April 140 / 145 bull call spread is currently priced for $2.80 with shares at $144.35. A max gain of $2.20 would be possible if shares moved less than 0.50% over the next 29 calendar days, while today’s share price would bring in $1.55 in profit as the spread would expand to its intrinsic value of $4.35. All told and seeing how shares are within buying range as espoused by methods used by many growth traders, that type of pricing looks like a decent spot as any to begin one’s own homework with.
Senior Options Writer, former Market Maker & fulltime Option Hedge Hog Advocate
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The information offered here is based upon Christopher Tyler’s observations and strictly intended for educational purposes only, the use of which is the responsibility of the individual.