March 19 - BIDU Trade Setup

BIDU, the Chinese search engine, has been benefiting much from the rumors that Google may close operations in China. According to an analysts estimates, this means 30% more business for BIDU which is certainly sizable. On all this BIDU's price has increased dramatically. Let's look at the one year plot on a daily chart with trend lines. I've also plotted volume and option volume for puts and calls. We can see the spikes in option volume.



The channel is visible and the break-out above it. Good rumors always drive up a stock's price, but the news release may disappoint. I don't think Google will just leave all operations in China and deprive itself of huge revenues associated with the Chinese operation, but then again.... This is Google! Will they put morals before revenues? We will see on Monday!

For now I see a huge run-up in BIDU and am thinking about a short position incase the news isn't as good as expected. I will obviously never short the stock as the risk is HUGE! I'm looking to buy puts for limited down side exposure. I've put in a bid for the JUN 340 puts for $1.35/share. If BIDU should skyrocket from Monday's news I will lose my premium which is $135 for every contract, the price of the contract will look as the plot below, depending on the price of the underlying (BIDU stock):


The returns are exponential if the prediction is correct. If BIDU should continue to go up then the price of the contract will move towards zero. I should mention that I do not wish to hold these until June, this is a leverage play. If BIDU goes down fast, the options will increase quickly and I can sell at a high premium (as seen in the plot). I don't expect that the stock price will go to $340. But anything below $500 will get a nice return.