Upgraded Baidu Stock Rallies Into Familiar Resistance

Short-term BIDU options are relatively cheap at the moment

May 11, 2018 at 11:57 AM
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Chinese internet stock Baidu Inc (NASDAQ:BIDU) was upgraded to "market perform" from "underperform" and saw its price target hiked to $305 from $240 at Bernstein. The brokerage firm projected 20% growth for the company following a recent string of divestitures -- including the sale of its food delivery firm to Alibaba's (BABA) Ele.me -- and the successful U.S. trading launch of iQIYI (IQ), of which BIDU owns a majority stake.

After coming within a chip-shot of its Oct. 17 record high of $274.97 earlier, BIDU stock was last seen up 0.3% at $269.43, bringing its week-to-date gain to 7.1% and its 2018 return to 14.6%. This positive price action just echoes the equity's recent trend, with Baidu gaining 26% from its early April lows. However, the $269-$272 region has served as staunch resistance since that mid-October peak.

bidu stock chart may 11

In the options pits, meanwhile, it's rarely been a better time to buy premium on Baidu shares. The stock's Schaeffer's Volatility Index (SVI) of 28% ranks in the 16th annual percentile, indicating low volatility expectations are being priced into short-term options.

Plus, the stock has consistently rewarded premium buyers over the past year. Specifically, its Schaeffer's Volatility Scorecard (SVS) reading is docked at an elevated 93 out of a possible 100, meaning BIDU has tended to make bigger moves over the last 12 months than what the options market was expecting.

Those who may be hesitant initiating a bullish trade on a stock that's trading near familiar resistance could consider long call spread. By selling to open one leg of this modestly bullish spread, a trader can lower their cost of entry and breakeven point -- though, they also give up the unlimited profit potential of buying a call outright.


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