Monday, February 12, 2007

Bye Bye BIDU?

Is it time for BIDU to be the next sell on the news victim? Apparently, Cramer expects profit takers to emerge after the company reports earnings this Wednesday and since he's the mighty "oracle" we should all listen, right? Well actually in this case yes.

This is setting up to be a potential call credit spread play with the FEB 115/120 Call net credit trading around 2.20. Not the best r/r but should see some nice premium degradation from the IV decline that probably will result and maybe some underlying help.

Current IV levels on these calls are 90% which is above 52 wk highs (see IV chart below).



We'll see what happens....

7 comments:

Anonymous said...

What is a good r/r in your opinion for spreads play? thks

Pat

tmk0427 said...

1.5:1 or better which rarely happens.

Anonymous said...

ok, that's for a good r/r. What's the bare minimum you will go for? thks

Pat

tmk0427 said...

1.1 or better.

AJ said...

so in this example, you would be buying Feb 115 calls and selling Feb 120 calls ?
When would you profit on this? if BIDU goes below 115 , or above 120 ?

Thanks,
AJ.

tmk0427 said...
This comment has been removed by the author.
tmk0427 said...

You sell the 115s and buy the 120s. You'd get to keep the entire net credit if the stock price closes below 115 and lose the difference between the strikes less the net credit if the stock close above the 115 strike plus the net credit. Sounds confusing so here's an example: If you received a net credit of $2.20 and the strike difference was $5.00 maximum loss would be 2.80 and max reward would be 2.20. So breakeven would be around 117.20 and max loss would be above 120 and max reward would be below 115 at expiration. Hope that helps.