Investors seeking risky but intriguing opportunities in the market may consider Chinese multinational technology company Baidu (NASDAQ:BIDU). With geopolitical headlines cooling at the moment due to the U.S.-brokered ceasefire between Israel and Iran, investor focus has shifted toward compelling upside prospects. BIDU stock hasn’t been looking too hot amid U.S.-China tensions. However, that might change soon if the options market is any indicator.
On Tuesday, Barchart’s options flow screener — which focuses exclusively on big block transactions likely made by institutional investors — revealed that net trade sentiment clocked in at $784,200 above parity. Drilling down, the transaction with the greatest dollar volume was for sold puts expiring December 2026 for $164,000. However, the second-biggest trade was for bought calls expiring Dec. 19 of this year worth $152,600.
While reading into unusual options activity is always speculative, the latter transaction is significant because of the debit-based nature. Specifically, the trader(s) bought $70 calls with a premium of $20.35 each, meaning that BIDU stock must hit $90.35 to break even based on intrinsic value. This implies that the smart money anticipates a northward move for Baidu.
It comes down to logical deduction. For a debit-based strategy to be profitable, the trade must meet the profitability threshold implied by the structure of the transaction. So, even if you’re not interested in buying options, BIDU stock could be an intriguing proposition for open-market speculators.
However, the real fun begins for those interested in dabbling in the derivatives market. With the high payouts that multi-leg options strategies offer, the arena is awfully tempting. At the same time, traders must be cognizant not just of the magnitude component (y-axis) but also the time element (x-axis). As such, probabilities are everything.
To understand probabilities, one must conduct statistical analysis, which is deceptively difficult in finance. At first, you’d assume that you merely take the frequency of the desired outcome divided by the total number of events in the dataset. However, this exercise only calculates derivative probabilities or outcome odds over the dataset’s entire distribution. What we’re looking for are conditional probabilities — odds for a specific subset of the data.
To use an analogy, imagine air travel. We’re told that air travel is a safe mode of transportation but that’s an insight derived from the aggregate of everyone’s experiences. However, the odds of something terrible happening rapidly escalate if your pilot is inebriated. This latter situation is the conditional probability.
But to calculate such conditions, the underlying dataset must speak a unified language. That’s the reason why I’ve been focused on market breadth — sequences of accumulative and distributive sessions. Market breadth by nature is binary and thus, lends itself to categorization and quantification. Ultimately, these attributes facilitate probabilistic analysis through the study of past analogs.
In the past two months, the price action of BIDU stock can be covered as a 3-7-D sequence: three up weeks, seven down weeks, with a net negative trajectory across the 10-week period. In 57.97% of cases, the following week’s price action results in upside, with a median return of 3.77%. In contrast, the baseline probability that BIDU will rise over any given week is only 48.08%.
Those who want to roll the dice on Baidu may consider the 87/88 bull call spread expiring July 18. This transaction involves buying the $87 call and simultaneously selling the $88 call, for a net debit paid of $116. Should BIDU stock rise through the short strike price ($88) at expiration, the maximum reward is $84, a payout of over 72%.
Processing your submission
