Baidu Inc.: Let’s Trade the Options of Chinese Stocks (Part 2)

Baidu Inc. (ADR) (NASDAQ:BIDU) with its market capitalization of $71.77B is the equivalent of Google in China. The company is concerned with providing Chinese-language Internet search services to enable users to find relevant information online, including Web pages, news, images, documents and multimedia files, through links provided on its Websites.  In addition, it designs and delivers its online marketing services primarily on its Website to its online marketing customers.

Baidu in my Sights

We started an exploration of the options of Chinese companies yesterday in which we examined the put options of SINA Corporation. While I was researching the prospects of SINA Corp yesterday, Baidu crossed my line of sight and I observed that the Baidu has largely outperformed other similar Chinese stocks in the last one year.

As at market close yesterday, the shares of Baidu were up 0.42% to close at $205.30. The closing price of Baidu yesterday marks a 45.95% premium to its 52-week low of $140.66 and it marks a 22.74% discount to its 52-Week high of $251.99. Hence, the shares of Baidu appear to be close to rising towards its 52-Week high price than falling towards its 52-Week low price.

The chart below shows how the shares of Baidu have traded in relation to three other Chinese stocks within the last one year.

Chinese Stocks on the move

From the chart above, you’ll observe that the shares of Baidu have gained 27.84% within the last one year. In contrast, the shares of SINA Corporation (SINA) have nosedived by 49.8% in the last one year, the shares of Inc. (SOHU) have crashed by 31.5% and the shares of Youku Toudu Inc. (YOKU) have plummeted by 47.5% within the same period.

Insights on How the Shares of Baidu are Likely to Trade

I have strong optimism about where the shares of Baidu are headed as we expect the company to release its first quarter (Q1 2015) results on April 22. The chart below (with my annotations) provides an interesting insight into how the shares of Baidu have traded in the last one year and it provides insight into how we can expect the stock to trade in the next couple of months.

BIDU Chart

From the chart above, you’ll observe that the shares of Baidu have established a $200 support, which has held for the last five months as the green line shows. You’ll observe that Baidu always rises toward its previous highs after every drop towards the $200 support. Interestingly, Baidu is in another uptrend after it has dropped to touch a $203 trading price last Friday. The rising RSI of 42.78 also suggests that investors are buying the shares of Baidu; hence, we can expect the uptrend to continue in the near term.

For a possible reversal, you’ll observe that Baidu has a firm resistance at the $230 trading price as shown by the red line. You’ll observe that the shares of Baidu usually fall towards a $210 trading price every time it touches the $230 resistance point. The only period that Baidu traded above that $230 resistance point was in November through December 2014, but the stock is back under the resistance point again.

How to Trade BIDU Options

From the foregoing, shares of Baidu are not likely to crash below $200 unless something cataclysmal sends the stock into bear territory. In the same vein, shares of Baidu are not likely to zoom above $230 unless it records a stellar performance or impressively good news.

I am bullish on Baidu and I think it is smart to buy BIDU call options. The sweet spot for trading BIDU options is between $200 and $230; hence, I recommend buying the BIDU Jun 2015 210.000 call (BIDU150619C00210000) at an asking price of $10.60.

— Daily Option Alerts

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