Shares declined by 12.5% over nine days, or a -508% annual rate. The options produced a 141.2% yield on debit, for a +5,726% annul rate.
The Chinese-language internet search provider Baidu Inc. (BIDU), headquartered in Beijing, China publishes earnings on Monday before the opening bell.
[BIDU in Wikipedia]
I shall use the AUG1 weekly series of options, which trades for the last time 11 days hence, on Aug. 7.
Click on chart to enlarge.
|BIDU at 11:25 a.m. New York time, 30 days hourly bars|
|Week||SD1 68.2%||SD2 95%||Chart||Earns|
BIDU's business is in China, although it is listed on the NASDAQ in New York. The sharp decline of China's stock markets has given BIDU a huge downside gap at the opening, and that risk of increased volatility must be kept in mind while building a trade.
short the $170 puts and long the $165 puts,
sold for a credit and expiring Aug. 8.
Probability of expiring out-of-the-money
The premium is $1.23, which is 25% of the width of the position’s wings.The stock at the time of analysis was priced at $198.39.
The risk/reward ratio is 3.1:1.
The zone of profit in the proposed trade covers a $22.50 move either way. The biggest immediate move after each of the past four earnings announcements was $22.23, and the average was $15.77.
Decision for My Account
The risk/reward ratio is a bit high but otherwise, it's a reasonable trade. I've opened a position in BIDU as described above.
-- Tim Bovee, Portland, Oregon, July 27, 2015
My volatility trading rules can be read here.
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