05.14.2010
Baidu (BIDU) Hits Intraday Reversal
original article written by Net Advisor™
Baidu, Inc. (BIDU) – the leading Chinese search engine soared after its recent 10-1 stock split. (What is a stock split?)
[wikichart align=”right” ticker=”NASDAQ:BIDU” showannotations=”true” livequote=”true” startdate=”06-04-2010″ enddate=”06-10-2010″ width=”300″ height=”245″]
Red Flag #1
I thought about getting in (buying BIDU) because I figured others would do the same. They did. I didn’t. Why? BIDU’s stock was going parabolic (short term straight up movement) from 05-11 to 05-12-2010, (see chart).
This is a major red flag for me that the stock is peaking and the next move should be a reversal (down).
BIDU’s stock hit an intraday high of $82.89 on 05-13-2010.
Notice the trading volume here:
BIDU’s stock normally trades an average of 16mm shares (3 month average). On 05-13-2010 it traded 58.8 million shares (source: Yahoo Finance).
This to mean means “everyone is getting in” and it is time to get out. That is why I did not buy it. I actually thought about shorting it around $80-81. I chose to short the S&P 500 via put options instead thinking of a broad market sell-off could occur starting on or shortly after 05-13-2010, thus diversifying my risk from one company to 500 companies.
Red Flag #2
BIDU also had a negative price reversal the same day which is red flag #2. This is when a stock opens higher, goes even higher, straight up, especially on high trading volume, then closes lower. This suggests to me that the next move is a lower stock price. BIDU fell from its intraday high of $82.29 to $73.28 the next day. (Source: Yahoo Finance)
That BIDU short trade would have worked out with maybe a $7-8 share gain on a short sale.
The S&P puts worked out better however. Went short (bought) the S&P 500 ETF (SPY) May 114 Puts and June 110 Puts on 05-13-2010. My thinking is that the S&P 500 could fall at or below 114 by the 3rd Friday in May and or fall at or below 110 by the 3rd Friday in June.
Why by the 3rd Friday in those months? The 3rd Friday in EVERY month is when options contracts expire for that particular month. Thus, a May contract will expire on the 3rd Friday in May. A June contract will expire on the 3rd Friday in June, etc.
Public Service Announcement (PSA):
Options involve risk. So if one is not highly familiar with them, best get expert help before investing to see if they are suitable and right for your portfolio and investment risk temperament.
The next day (05-14-2010), the market (The Dow, S&P 500, and NASDAQ) all fell sharply intraday, and somewhat recovered toward end of day.
The May 114 Puts were up 104% (at the time I closed them out – they expire next week – 3rd Friday in May); and the June 110 puts were, at the time up about 64% (closed out of those too thinking that we could get a SEC-GS settlement package over the weekend or improved news from EU problems, so took the gains and will re-evaluate Monday 05-17-2010).
I didn’t not expect this big of a move the next day after buying the puts options, but I felt that the risk was there for a near-term market decline. I had to be right on those May put contracts, as I had 1 week (5 business days) to expect a modest market move to the downside, or the trade could have been a total loss.
The put options trade was basically a hedge against a portfolio. In the event long positions in the portfolio fell, the puts could reduce or offset the decline in the stock price from the long positions. It did. In-fact, because the put options increased in value faster than the long positions decreased in value (short term paper loss), the net result was an overall good gain in a down day in the market.
Another PSA: One should note that this was a flawless execution with perfect timing. It does not happen this way all the time. I am not going to tell people how to make a killing in options, or attend some overpriced seminar on how to trade them. In my career, I’ve had huge gains to total losses in options trading. A lot of people won’t tell you the downside risks. That does not sell seminars. Sometimes you just get lucky at timing things just right and you get out at the right time too! It helps to know what you are doing, and experience can be a good teacher.
BIDU’s valuation is way overpriced near-term, but long term it is interesting in my view.
Market Trends
The overall market trend I see is negative right now. This could change as new information hits the market. I would be generally defensive however. Hopefully people are working with someone who understands the problems that are going on economically and how they are impacting markets.
__________________________________________________________________________
Short Link: https://www.netadvisor.org/?p=5304
image copyright Baidu Inc., China
Copyright © 2010 Net Advisor™
Legal Disclaimer
__________________________________________________________________________