Tonight, Chinese search giant Baidu (BIDU) will report fiscal Q4 results. The implied move in the options market is about 5% in either direction, which is basically in line with the average one day move over the last 4 quarters and below the 10 year average one day post earnings move of 7.5%.
BIDU’s stock is having a heck of a year so far, up 12%, and up about 15% from its November lows at $160. While $160ish served as substantial technical support on a few occasions last year, it’s important to note that the stock’s 4 month high made this morning was shy of the September high, which itself was shy of the 52 week high made in late April. If the stock backs off from this recent high a series of lower highs trend will remain intact:
And that series of lower highs over the last year is even more important when you consider the downtrend from the all time highs since late 2014. The chart has formed a bit of a triangle, or a wedge. That could resolve itself with a breakout, or possibly a re-tracement back to the uptrend that has been in place from its 2013 lows:
So What’s the Trade?
We’re going to look at two bearish trade ideas, one focuses more near term and positions for a move on earnings in line with the implied move of the event itself, it then allows for further gains until March expiration if the stock continues lower. It is a put spread calendar, selling a weekly put at the implied move, expiring tomorrow, and using that put sale to finance the purchase of a closer to the money put in March:
BIDU ($185) Buy the Feb24th 175 / March 182.5 calendar put spread for 3.75
- Sell 1 Feb24th 175 put at 1.00
- Buy 1 March 182.50 put for 4.75
Breakeven on Feb24th expiration: The ideal situation is the stock is close near 175 tomorrow. Gains if the stock goes down at all, losses if the stock goes higher, but only mark to market, the March puts will not be worthless unless the stock is significantly higher.
Rationale – This trade idea targets the implied move near 175. Because its short put expires tomorrow, but its long put doesn’t expire until March expiration, it can win in a number of ways. Even a mild move lower is likely to see profits as the Feb24th puts would expire worthless and would help to cover any vol crush in March puts. If the stock is unchanged the position is still fine (maybe with a slight loss mark to market) but the March puts can be further spread after closing the short Feb24th put, further reducing premium at risk. The worse case scenario is the stock is higher, in which case the trade will be a loser. But the chances of it being completely worthless are slim unless the stock is significantly higher. Even in that case the most that can be lost is 3.75. If the stock were to gap lower significantly, even below the 175 strike, the trade would max out as a double, worth 7.50, even if the stock was zero, the gains until tomorrow at the close are capped at that short put strike in the weeklies. It’s less complicated than it sounds, it’s a put spread that isn;t binary because the March puts are still in play after tomorrow’s expiration.
The second way to position for a move lower is to go out to April with a simple put spread. If you were inclined to play for a pullback towards the long term uptrend this defines risk to $5, looking out a couple months:
BIDU ($185) Buy April 180 / 155 put spread for $5
- Buy to open 1 April 180 put for $5.80
- Sell to open 1 April 155 put 80 cents
Break-Even on April Expiration:
- Profits: up to 20 between 175 and 155 with max gain of 20 at 155 or lower.
- Losses: up to 5 between 175 and 180, with max loss of 5 or 2.7% of the stock price above 180.
Rationale – The implied move on the event itself is nearly $10, this trade idea risks half of that with a breakeven at the implied move. But this has until April, so a big move lower all at once on earnings isn’t necessary. Any move lower by a few dollars is enough that this would be profitable following earnings. Ideally it would make a move at least to the implied level on the downside of 175. The biggest risk of course is a sharp move higher on earnings. Since it’s April expiration, it’s unlikely to be worthless on a move higher, but a move higher in line with the implied move (to 195) would mean losses mark to market. If the stock goes nowhere on earnings it would be a small loser as April volatility comes in a few points. On that front, April vol is not that high historically, so the vol crush shouldn’t be too significant.