This Stock Looks Poised to Rally

Shares of Chinese search giant Baidu (NYSE:BIDU) are on the move higher once again. Sentiment is improving on BIDU stock now that trade talks between the U.S. and China are back on.

Earlier this week, the White House said that it had invited Chinese representatives back to the bargaining table to work out a trade deal.

It’s a breath of fresh air in the U.S./China trade war, and represents a potential trading opportunity for beaten down Baidu stock.

A Technical Look at Baidu Stock
Starting with the technical outlook, price action for BIDU shares is improving.

The stock is rebounding off a potential double-bottom near $210.

This is an especially positive sign given that Baidu stock’s 50-day and 200-day moving averages just completed a “death cross” at the end of August.

Selling pressure, it seems, has been cut short on the shares.

BIDU stock
This is not without its caveats, however. There is short-term resistance just overhead in the $225-$230 region. The $230 area was a prior area of price support for BIDU, but switched roles and rejected the stock on Aug. 27. A breakout above this region should provide another influx of buying activity for the shares.

From a broader perspective, sentiment still has quite a bit of room for improvement. Data from Thomson/First Call indicates that only 19 of the 33 analysts following BIDU stock rate the shares a “buy” or better. The 12-month price target comes in at $292.98. Both indicators could stand to see a bump, especially if the U.S./China situation turns around.

Baidu stock’s options backdrop is also quite reserved. Currently, the October put/call open interest ratio comes in at 1.10. Speculative traders are clearly favoring puts over calls in the back-month series. Still, a breakout above $230 could turn things around.

An increase in call activity relative to put activity in October would be a sign of an improved outlook for the shares.

Finally, October implied volatility is pricing in a 5.3% move heading into expiration. This puts the upper bound of the expected move at about $234, while the lower bound rests at $210 — home to the recent double-bottom for Baidu stock.

2 Trades for BIDU Stock
Call Spread: While the outcome of the U.S./China trade talks is unknown, the fact that the U.S. reached out should help lift sentiment for the time being. As such, BIDU stock should benefit from higher prices. Traders looking to benefit might want to consider an Oct $230/$240 bull call spread.

At last check, this spread was offered at $2.63, or $263 per pair of contracts. Breakeven lies at $232.63, while a maximum profit of $7.37, or $737 per pair of contracts — a potential return of 180% — is possible if BIDU stock closes at or above $240 when October options expire.

Put Sell: If you’re looking for a more conservative play on BIDU stock, then an October $200 put sell might be a way to capitalize on technical support. At last check, this put was bid at $1.53, or $153 per contract.

As always, you keep the premium received as long as BIDU stock closes above $200 when October options expire. The downside is that should BIDU stock trade below $200 ahead of expiration, you could be assigned 100 shares for each sold put at a cost of $200 per share.

— Joseph Hargett

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Source: Investor Place