Large options trades can provide clues to make market moves, notes Jay Soloff....
Example Iron Condor Option Trade in Baidu (BIDU)
03/17/2010 12:01 am EST
Baidu (NASDAQ: BIDU) shares have climbed more than 50% since the China-Google fallout began late last year on hopes that the Chinese Internet search giant would stand to benefit greatly from less competition. Yesterday’s news about Google’s imminent exit from China sent BIDU stock racing above the $600 mark for the first time ever on more than double the average daily volume.
But the new all-time high at $628.50 achieved during pre-market trading yesterday was severely rejected during the regular session, which only saw a high of $599. Investors may be pausing ahead of final confirmation of GOOG’s “exit strategy.” With a trailing P/E multiple of 88, far above GOOG’s 28, “perfection sans competition” may already be priced into BIDU shares and this short iron condor intends to benefit from a $120-wide trading range between $520 and $640.
Iron Condor Trade Details
BIDU is currently trading at $577.59 at the time of this writing. Prices may have changed by the time you are reading this. However, the setup can be instructional regardless of what the price may be in the future.
Below are the elements (one bull put spread, one bear call spread) for this iron condor.
If possible, use a limit order to place this trade, specifying one price for the four-legged strategy.
Iron Condor Part I: Bull Put Spread
- Sell the June 520 put
- Buy the June 500 put
- Net credit of $4.60 per spread
Iron Condor Part II: Bear Call Spread
- Sell the June 640 call
- Buy the June 660 call
- Net credit of $4.40 per spread
Overall credit for the four-legged spread is $9.00.
Maximum Profit: $9.00 (the total premium collected) minus commissions
Maximum Risk: $11.00 (the difference between call or put strikes minus the premium collected). Return on risk is approximately 82% for this strategy
Upper Breakeven Price: $649.00 (the strike of the sold call plus the total premium)
Lower Breakeven Price: $511.00 (the strike of the sold put minus the total premium)
By the Staff at ONN.tv
Find additional option information and ideas at ONN.tv
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