Seeking Alpha
Profile| Send Message|
( followers)  

As I wrote in a previous article here on Seeking Alpha, investing long-term in Chinese internet stocks is a risky proposition due to the constant regulations and crackdowns that the Chinese government always seems to make happen, but trading these types of stocks based on an earnings release can be very profitable.

I see Sina Corporation (NASDAQ:SINA) as being such an opportunity. Sina Corp. provides online media and mobile value-added services (MVAS) in the People's Republic of China. It provides advertising, non-advertising, and free services through SINA.com, Weibo.com, and SINA Mobile. SINA.com offers free interest-based channels that provide region-focused format and content, including news, sports, automobile-related news, finance, entertainment, luxury, technology, digital, tools, collectibles, video, music, and wireless application protocol, as well as interactive platform for fashion-conscious users to share comments and ideas on a range of topics, such as health, cosmetics, and beauty.

Sina Corp. is scheduled to report earnings after the market closes on Tuesday, May 15, 2012.

Currently, Sina is trading at $53.71/share. The 52-week range is $46.86 - $128.17, so volatility is not an issue here. I love trading this stock using my daily option trading strategy because of this, which you can read more about here.

The type of options strategy I will be using for this trade is the 'reverse iron condor' spread. Since this stock is so volatile, I am choosing to use the June 2012 expiration with the anticipation that Sina Corp. will be trading at one end (the trade is neutrally based) of the profitable side by expiration.

The 'reverse iron condor' is made with a net debit instead of a net credit. It is a neutral strategy that can profit when the stock moves up or down. This aspect appeals to many traders. Another factor that is great about the 'reverse iron condor' is that since it is placed as a net debit, you do not need a higher level options trading account. Most credit spreads require a Level 4 account, and many traders do not have this level yet. This trade can be placed with most brokers by only having a Level 2 or 3 account.

The 'reverse iron condor' is a strategy that appeals to a lot of people who trade options for several reasons. First, the amount of risk is known from the start. The highest potential of profit on the trade is also known from the start. Therefore, it is a limited risk, limited profit strategy, but also has a higher profit potential than many other spreads.

The 'reverse iron condor' is a complex trade that has four (4) "legs" to it, but is placed as a spread to minimize commission costs. However, you can "leg" into the trade individually. Let's take a look at how the trade is placed. For explanation purposes, I will use the one (1) contract for each "leg" to simplify the example for understanding the trade.

  • Buy one (1) out-of-the-money put option (Higher Strike)
  • Sell one (1) out-of-the-money put option (Lower Strike)
  • Buy one (1) out-of-the-money call option (Lower Strike)
  • Sell one (1) out of the money call option (Higher Strike)

Since Sina Corp. is currently trading at $53.71/share (this can obviously change, so adjust the strike prices if necessary, here is how I will be placing this trade.

  • Buy (10) SINA June 2012 $47.50 strike put options
  • Sell (10) SINA June 2012 $45.00 strike put options
  • Buy (10) SINA June 2012 $55.00 strike call options
  • Sell (10) SINA June 2012 $57.50 strike call options

Requirements

Cost/Proceeds $1,520.00
Option Requirement $0.00
Total Requirements $1,520.00
Estimated Commission $50.00

Current Price: $53.71

Price Profit / Loss ROI %
33.75 $980.00 64.47%
41.07 $980.00 64.47%
45.00 $980.00 64.47%
45.98 $0.00 0.00%
47.50 ($1,520.00) -100.00%
48.77 ($1,520.00) -100.00%
55.00 ($1,520.00) -100.00%
56.47 ($49.00) -3.22%
56.52 $0.00 0.00%
57.50 $980.00 64.47%
71.88 $980.00 64.47%

Sina Corp. does make decent to above average price moves post-earnings, but never stays in a range for too long, and having the June 2012 expiration should work here and net a 64% profit, minus commission costs. Not too shabby, and much more than I expect the stock to move by that time. This should be a very solid trade.

If you have any questions, please leave a comment or send me an e-mail. Thanks again.

Source: Trading Sina Corporation's May 15th Earnings Release