This post was originally written on January 10, 2013 at http://www.optiontiger.com/trade-idea-bidu-bear-call/
Anybody watching BIDU in the last 6 weeks or so deserves to be in the doghouse if they didn't take a bullish trade (myself included). It bounced strongly off a bottom of 85, and it gave good entry points at 90, 95 and more. Sadly, I missed this one and by the time I saw it, it was $100 already. The risk to reward at that point didn't seem favorable, but its at 110 today. Talk about a slap in the face.
But, looking at the BIDU chart today (its made a strong $5 move today), we can notice a few things -
1) Its made a strong move above the Upper Bollinger band
2) Its had a 25% run in 6 weeks
3) Look at overhead resistance (red line) at the 115 level. There are at least 8 to 10 touches in the last 4 or 5 months, and the level held strong. This would definitely represent a strong resistance for any upward move. But BIDU looks like it has gathered the energy to break through this level, only the next month will tell.
4) To appreciate how strong this move has been, check the 20 day Moving average (blue line) crossing above the 50 day MA (purple) a few days ago. Amazing move, this is the "Golden Cross" - This is bullish..
So should you go Long BIDU ? Or do you think it will turn back and should you go SHORT ? Well, either strategy looks a bit risky. Buying a Call or Put seems equally risky. This is exactly where you should use an OTM credit spread and put Probability on your side.
Given the first 3 factors listed above, a Bear Call spread at 120/125 seems like a good trade. There is strong resistance at the 115 level, and the stock has poked its neck way above the Bollinger band. A temporary stalling is to be expected. Let's put time decay on your side as well as probability. Beyond 115, we still have a buffer of $5 upto 120.
The trade is -
- 120 / 125 Bear Call spread
- Feb series with 36 days left, 10 contracts
- Credit $0.83 at 1 pm ET on Jan 10, Risk = $4.17
- Return possible 22% in 36 days if BIDU expires below 120.
- Delta of the 120 short Call = 0.24
What do you think of this trade ? Makes sense ? Or too risky ? Whatever your opinion is, post your thoughts….I think its a decent trade, but will be watching it and will be ready to adjust if BIDU pounds higher..
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.