Monday, July 27, 2015

BIDU Analysis

Update 8/5/2015: BIDU was on the edge of its profit zone as expiration neared and I exited for a profit.

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
Implied volatility stands at 47.8%, which is 3.1 times the VIX, a measure of volatility of the S&P 500 index. BIDU’s volatility stands at the peak of its most recent rise.

Ranges implied by options and the chart
WeekSD1 68.2%SD2 95%ChartEarns
Implied volatility 1 and 2 standard deviations; chart support and resistance, maximum earns move

The Trade

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.

Iron condor, short the $215 calls and long the $220 calls,
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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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 decisions for his or her own account, and take responsibility for the consequences.

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