On Tuesday in my In The Money series with Fidelity Investments, we discussed the market’s volatility on the heals of the spreading of the coronavirus and detailed a couple options strategies to express views in a couple of single stock names, one Baidu (BIDU), the Chinese search engine company, which will be uniquely affected by the pandemic that emanated in China, and one on eBay (EBAY) a U.S. company that has no exposure in China and might be worth taking a look at for a whole host of other reasons. Click below to watch:
Trade Idea #1: Baidu (BIDU)
The company will report Q4 earnings tomorrow after the close. The options market is implying about a 9% one day move on Friday, which is essentially inline with the average one-day post-earnings move over the last four quarters.
I suspect the company will guide down for at least the current quarter, possibly lowering the full-year outlook.
The near-term technical set up is not great, this week breaking below the uptrend that has been in place since November, and hovering above $120 which has been resistance from May until December. A break below places the next big support level near $100:
If you agree that the company is likely to miss and guide lower, and the magnitude of the guide could cause the stock to break below near-term support, pushing it towards the Nov low, then consider defining your risk with a short-dated put spread:
Bearish Trade Idea: BIDU ($126.50) Buy March 120 – 100 Put spread for $3
-Buy to open 1 March 120 put for $3.40
-Sell to open 1 March 100 put at 40 cents
Break-even on March expiration:
Profits of up to 17 between 117 and 100 and max gain of 17 below 100
Losses of up to 3 between 117 and 120 with max loss of 3 above 120
Trade Idea #2: eBay (EBAY)
eBay been in the news of late, in the next month or so a $4 billion deal to sell StubHub should close, and now, they are in the process of receiving interest in their international classifieds ads biz that some see could net them $10 billion, and last month NYSE owner ICE supposedly considered buying the company as they are interested in their core marketplace business.
eBay as a $30 billion market cap, $3 bil in cash and $8 bil in debt… there are two activists involved and an interim ceo…a takeover could be in the cards with these two non-core businesses gone…
If you agree where there is smoke there may be fire, and the greater success activists have with an interim CEO to sell non-core businesses, growing their cash hoard, making the company a more attractive take0ver candidate by private equity, or a strategic, then consider buying intermediate-term calls…
Bullish Trade Idea: EBAY ($37.50) Buy June 40 for 1.30
Break-even on June expiration:
Profits above 41.30, up 10%
Risks 3.5% of the stock price.
Looking at the five-year chart you see the tension that has been building over the last year, working into a triangle formation that could see it resolved to the upside on the slightest hint of real takeover interest: