Trading Idea for Bearish Move in BIDU

08/13/2010 12:01 am EST

Focus: STOCKS

As the sentiment in the broad market has turned from ebullient to negative this week, investors might be looking at the recent run up in Baidu.com (BIDU) shares and wondering if the stock could be due for a pullback. Since announcing earnings on July 21, the shares have popped roughly 10% from below $75 to near $83, even after Wednesday’s selloff.


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In Thursday’s market action, BIDU was down 60 cents at $83.63, about 5% off its 52-week high. For traders who think a slide back towards $75 could be in the offing, a bear put spread might be in order.

Traders could potentially buy the January 80 puts and simultaneously sell January 70 puts, paying a net debit of $4 per spread. The most an investor can lose trading this spread is the entire premium paid, or $4 ($400 per lot). This maximum loss occurs if BIDU is trading above the long put strike (80) when the options expire.

The maximum gain is the difference in strikes minus the debit, or $6 per spread ($600 per lot). If BIDU is trading below $70 when the options expire, the investor achieves this maximum profit potential. (Return on risk is 150%). The investor breaks even if the shares are south of $76 at expiration in January. This is a decline of 9% from current levels.

By the Staff at ONN.tv

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