New Era Begins for BIDU Traders

10/31/2011 9:50 am EST

Focus: STOCKS

John Carter

Author, Mastering the Trade

Baidu.com, Inc. (BIDU) has had a great run to the up side, but John Carter describes the massive technical pattern that has shifted the focus firmly down and tells how to use options to play it.

When you talk about the most popular stocks for daytraders and short-term traders, certainly BIDU is going to be part of that conversation.  

Our guest today is John Carter to talk about that stock particularly and how he’s trading it. John, talk about BIDU, your overall outlook on it, and how you’re trading it.

I think the new symbol for Baidu.com, Inc. (BIDU) is going to be D-O-N-E; it’s done.

On the daily charts, it’s got one of the most massive head-and-shoulders topping patterns I’ve seen. This pattern has been taking shape over the last six or seven months now.

The stock has obviously defied gravity. I love to trade it; it’s great stock to trade, even to trade on options.

I remember when it was up to almost $1000 per share and then it split ten-for-one. It’s been a great ride on the way up, and now it’s going to be a great ride on the way down.

Technically, I’ve not seen a stock in recent memory that’s been as done as this one.

We’ve had a few head-and-shoulders patterns in the S&P that have failed. That pattern hasn’t worked out as well as a lot of people would have liked recently.

What levels are you looking for to say that it is working and what action are you going to take there?

That’s a very good point, and there have been some head-and-shoulders tops in the S&P that you kind of watch and you say "Wow, this is developing; lets see how this turns out."

The problem with that has been in the overall scheme of things in the S&P, you’ve had extremely strong signals on the weekly charts, and you have to have those kind of weaken out before that market could roll over. It’s the same thing on BIDU.

What I’m looking at here is I need to see a break of $120 a share. If we can break $120 a share and close below that level on a weekly basis, what I’m looking at there is a head-and-shoulders pattern has now been triggered and I’m looking for many, many months of movement to the downside. At least a test of $100, at the minimum, but I’m also looking for a break of $100 a share.

Will you be shorting the stock, buying puts; what’s your favorite thing to do there?

For me on something like this, I’m a fan of buying puts, and what I will do is buy a variety of strike levels.

There’s two ways you can do this: At $120, you could get some slightly in-the-money puts, the 125’s, but then out there in November or even December and just hold on. The problem with that is the premium on that is ridiculous. The implied volatility on BIDU is very, very high, so you’re going to have to pony up for that.

Another way to do it would be just to buy the front month and then just roll it over every month.

What I like to do on something like that is I will buy the monthly option, the puts, I’ll get the $125 put, but then every week I’ll sell out-of-the-money weeklies against it.

For more advanced options traders, that is being able to kind of take advantage of that high premium on the weekly options, collect it, because you’re selling an out-of-the-money put, but then hold on to that monthly one to take advantage of the movement down.

In that case you’re pretty much covered in case you get called; you’re protected on either side then.

Correct, correct.

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