On February 13th, about a week before Baidu reported their fairly mixed earnings, I reccommended the following trade. I suggested buying January 2014 100 dollar call for 55 dollars, selling the January 2014 Call at the 200 dollar strike for 15 dollars, and selling the January 100 dollar put for 100 dollars. Investors or traders who put this trade on would be up about 10% if they sold and bought the same amount of calls and puts as recommended by me in the trade.
What to do now? Well, with Baidu (BIDU) now partnering with Apple, the stock still priced at a very appealing roughly 20-21x next years very reasonable estimates, and volatility levels in the stock's options still low, I think it is time to up the ante.
While the company's near-term earnings presented a significant risk that elevated option premiums after they delayed the announcement, premiums have dropped by about 10-15% since the company's fairly uneventful report several weeks ago.
Here's what I would do now. I would buy-back the January 2014 put option sold for roughly 15 dollar at the current price of 13.25-13.50, and I would double the amount of in-the-money call options held at the 100 dollar strike expiring in January 2014 while selling the same amount of out-of-the money calls at the 200 dollar strike level for the same month's contract as well.
The primary reason I would do this is because I believe the market will continue to move higher and I think both Baidu , as well as Chinese and other Asian equities, will likely perform better in the second half of the year as Europe stabilizes and growth estimates here and abroad likely rise. Asian and most emerging market equities have lagged most U.S. indexes considerably so far this year.
While the implied volatility in Baidu options has now dropped, selling the out-of-the-money call options for nearly 13.50 each prevents a trader or investor from being by near-term time decay.
I also think BIDU is the best positioned Asian stock to continue to move up significantly because of a number of factors including the company's recent mobile partnership with Apple (AAPL) that I detail in more depth in my other February article on Baidu. Buying back the put while selling the call enables the trader to still have significant upside in the trade without being forced to maintain above average levels of cash in their brokerage or trading account.
To conclude, I still think the overall market has additional upside through the end of the year. While Asian equities have underperformed the nearly five month rally up to this point, I think rising growth estimates and some company's specific catalysts for stocks like BIDU could cause stocks in Asian and other emerging market to outperform in the back half of the year, and I would stay long.
Staying long while selling the out-of-the-money calls offers traders and investors a way to take advantage of the upwards trend without having to day trade the market. As we've already seen with momentum stocks like Apple, Mastercard (MA), Chipotle (CMG), and Priceline (PCLN), once growth stocks begin to take off, the rallies in names like this can be as swift as they are strong.