Strangle Option Strategy on BIDU – earnings play

Alright Traders this is one we have been waiting patiently for.  The Baidu (BIDU) earnings play.  Earlier in the month the company threw us a curve ball.  We loaded up the Strangle (I’ll explain what that is in a minute) and then the company decided to delay its earnings.  Well the time is here again, BIDU is scheduled to report earnings after the closing bell on 2/16/2012.  So let’s dive into the analysis and the best way to play the earnings report.

Strangle Option Strategy

BIDU Stock Chart

 

 

In this chart I chose to zoom out and show you a weekly chart of BIDU because it really drives home the visual and clears the clutter from the daily chart.  As you can see the company has been in a profound uptrend and now the stock has become range bound trading inside  the blue box.  This sideways trading box is important for the analysis because as you can see the stocks price after Wednesdays close, currently sits roughly in the middle of the trading box at $138.32.  Earnings is the catalyst to drive the stock either back up to the top of the range in the $160 area or if Baidu (BIDU) disappoints, the stock could fall back into the low $100’s.

I also posted a snapshot of Baidu’s earnings and sales up to 4 quarters ago.  From this snap shot you can see the company consistently has quarter after quarter of growth in sales and earnings.  I anticipate the company to have a strong earnings report since they are the Chinese version of Google and they have no real competition especially since Google has lost market share in China and is in a constant battle with the Chinese government over censoring Google’s web portal in China.  So if they  beat earnings one can expect a rally to the top of the green range however if after consistent quarter and earnings growth the company misses earnings, investors are surely to be disappointed and shares could fall down into the lower end of the red range.  All that being said sets the stage for a “Strangle”

A Strangle is where we buy a call option one strike price above the current trading price of the stock ($138.32) and simultaneously buy a put option one strike price below the current price of the stock.  Looking at the options chain as the market is closed.  We would look at the Feb. expiration $140 call option currently trading at $4.65/contract.  On the put side we would look at the $135 option currently going for $3.65/contract for a total price of $8.30/ per (put & call)contract.  Your break even point on the upside of the trade is when the stock hits $148.30 and on the downside $126.70.  Anything outside of these parameters it is time to ring the cash register for a profit.

  • Alright traders so the BIDU trade did not work out so nicely. Every trade won’t be a winner, but speaking of winners, we had a good 5 or 6 trades that were 50%-100% return. Remember no one trade will make or break us unless you are trading recklessly. On to the next one.