Trading Idea for Bearish Move in BIDU
08/13/2010 12:01 am EST
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.
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.tvRemember, trading ideas are generated by the ONN Idea Generating Platform as a starting point for people to begin their own research. Trading ideas are not intended as trading or investment advice or recommendations that any particular security or strategy may be suitable for any specific person. You are solely responsible for your investment decisions, but we hope that some of these ideas will give you a starting point as you look for strategies to employ.