QIHU shares gained a 17% during the 27 days the position was populated. The position was structured as short option spreads, and they produced a 22.7% yield on risk.
Qihoo 360 Technology Co. Ltd. (QIHU) broke above its 20-day price channel on Wednesday, and confirmed the bull signal today (Thursday) by trading above the breakout level, $30.89.
QIHU is a relatively new stock. It began trading on the New York Stock Exchange on March 30, 2011, when it opened at $27.
Since then, has fallen to $13.71 in January 2012, risen again to $26.35 in late March 2012, fallen to $13.80 in July 2012, and then risen to its most recent high, $34.90, on March 5.
It's a classic double bottom pattern, with a slightly lopsided neck (so far) stretching from $36.21 to $34.90. By that analysis, a break above $36.21 would signal a major upward move of more than 50%. If you believe in that sort of analysis. Which I don't.
Instead, I see the breakout as an attempt to recover from a correction in an uptrend that began from $13.80 in late July. There is major resistance between $34 and $35, and a move above $34.90 would set a higher high, re-establishing the uptrend.
That gives me about 9% worth of rise before the prior peak is reached, which is certainly sufficient for my purposes.
This is QIHU's fourth bull signal since the present trend began in July 2012. Of the prior three, two produced profits, averaging 31.7%. One was a failure, with a 15.1% loss. That's a 16.6% yield spread between the winners and losers, which quite mpressive.
Since the company started trading in New York, it has produced eight bull signals, including the current one. Of the seven that have been completed, three were profitable, and four were not. The winners on average yielded 21.8%, compared to a loss of 10.9% for the unprofitable trades. The yield spread between winners and losers is 10.9%.
On the chart and given the odds, QIHU is quite an attractive trade. Let's look deeper.
Qihoo 360 Technology is a Chinese computer security software company that is branching out into a broader array of Internet services, including search, which pits it against China's Internet giant Baidu (BIDU). Qihoo is headquartered in Beijing. The company's name is pronounced "CHEE-HOO".
Although Qihoo is a Chinese company, it is principally traded in New York. It is followed by slightly more than a handful of analysts, who collectively give it a 43% enthusiasm rating.
The company's financials are OK but not indicators of run-away growth. Return on equity is 11%, and it has no long-term debt.
It has been profitable for the eight quarters of its history and from 2012 onward profits have tended to be fairly stable. The 4th quarter of 2012 was the highest profit ever reported, but only beat out the previous high by a penny.
Institutions own 35% of shares, and the price has been bid up to levels reminiscent of the dot-com bubble of the late 1990s. It takes $81.32 in shares to control a dollar in sales. Now, if I were a long-term trader, that fact alone would be a total deal killer. Warren Buffett I have no doubt would have stern words to say about such a foolish assessment of value.
But, I speculate across the shorter term, with positions lasting a month or so, so it's a risk that I'm willing to consider.
QIHU on average trades 1.3 million shares a day and supports a good selection of option strike prices with open interest mainly running to three figures. The front-month at-the-money bid/ask spread is 7.5%, which is remarkably narrow for a stock with this level of liquidity.
Volatility stands at 44%, slightly below the mid-point of the six-month range. It has been trending sideways since the beginning of April.
In the analysis that follows I'll use the term "68.2%" in several places. It represents one standard deviation, which is a boundary that is expected to include 68.2% of whatever is being studied. It's a measure of confidence that also says that 38.2% of whatever is being studied will fall outside of that range.
Options are pricing in confidence that 68.2% of trades will fall between $27.93 and $36.03 over the next month, for a potential gain or loss of 12.7%, and between $30.04 and $33.92 over the next week.
There is a lot of options activity today, biased to the bull side. Calls are running at more than three times their average volume for the last five days, while puts are only at 63% of average volume.
The fair-price zone runs from $31.75 to $32.11, encompassing 68.2% of transactions surrounding the most-traded price, $31.95.
Qihoo next publishes earnings on May 20.
Decision for my account: I've opened a bull position in QIHU, structuring it as a vertical credit spread expiring in May, short the $31 call and long the $29. The position has a maximum potential yield of 19.9%. It is profitable at expiration down to 5% below the entry price, providing a cushion.
A somewhat out-of-date version of my trading rules can be read here. A discussion of recent modifications to my trading methods, which haven't yet been incorporated in the original write-up, can be found here.
And the classic Turtle Trading rules on which my rules are based can be read here.
Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.