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Baidu (NASDAQ:BIDU) is a fun company. The stock has been a great performer over the years, especially for those that have owned it since the beginning. It is a play on internet, advertising and China.

Here we will discuss an idea of how to play the earnings release that is scheduled for after the bell today.

The current expected move for the stock is about $9. That puts the stock at either $65 or $83 by August’s option expiration day. The way to determine the expected move is by adding the price of the two “at the money” options together. With the stock currently trading at $74 a share we can take the $72.50 call plus the $75 put and subtract from there the $2.50 of intrinsic value and that gives us $8.75.

Here is the chart for BIDU (click to enlarge):

We can read the chart two ways.

The bulls say: This stock is strong, it is currently consolidating for its next leg up. It is holding support and having a tough time breaking to a new high. Don’t worry, that will come with their earnings release. They are killing Google (NASDAQ:GOOG) when it comes to China. Only a matter of time before the stock hits a new 52 week high and see $100 a share.

The bears say: Look at the P/E ratio - enough said. The short interest has been falling but look at the put / call ratio, it is rising again. Did you see what happened to Google when they announced earnings? Baidu has always tracked Google and now the past 6 months have been just ridiculous. Everyone thought Baidu would take over market share from Google because China banned Google, but now they renewed Google's license. Wait till the earnings - this stock will be a $50 a share.

The options trade:

Instead of going long or short the stock there is an option trade we can do. It is called a vertical spread. I will give the example with calls but the exact some thing can be done with puts.

A vertical spread is when you buy say the $75 call for $4.50 and then sell the $80 call for $2.50. This will cost you $2.00 and if the stock stays about $80 a share, at expiration you will make $3.

How did that work? The difference between the $75 strike price and $80 strike price is $5. Assume the stock is at $85 on expiration date; your $75 call will be worth $10 and your $80 call will be worth $5. Since you bought the $75 call and sold the $80 call, you just need to keep calculating the difference in price between the two.

There may be times in a vertical spread trade when you do not need to wait until the options expire to lock in your profit. If Baidu goes up to $100 a share overnight, then within a few days you will be able to sell this option combo for $4.95.

Disclosure: No positions - still deciding which way to go.

Source: Playing Baidu Earnings With Options

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