Playing Baidu Earnings

If you've bought even just one at-the-money call option on Apple, Google, or IBM this quarter for its earnings, you've made yourself some good money. Google up $60 the next day, Apple up $25, and IBM, normally less volatile than the former two, up $10 on knee-jerk reactions. All moves greater than expected volatility priced on the weekly options.

Later today, Baidu, the Google of China, will release its own second quarter earnings and the stock is being pushed to new heights. Trading currently at over $157.40, the stock is at a new all-time high, with growth nearly doubling every year. That's unbelievable growth, but also unbelievable expectations.

There are typically four ways to make money on an earnings via the options route. If you're bullish on the earnings report, and think that the stock will fly higher, even at nearly 100 multiple, then a bullish options trade might be best.

Today, I implemented a bull call spread. This type of trade mimics buying the stock and writing a call, without risking an additional $150 per share. I purchased the July29 calls at a strike of 155.00 for a cost of $7.70. I later sold, after the stock made a move, the 165.00 call with the same expiration for $3.77. This comes to a net cost of $3.93. Instead of buying the shares for $157.50, I only paid $3.93 to make the same gamble. The only difference is that my profits are capped if the stock moves above $165, but I would still earn $6.07 or 154 per cent return with the best-case scenario.

The reason one may implement a bull call spread versus a regular call purchase is that it lowers the cost to something reasonable. It also significantly lowers the cost if one were to purchase the shares, with the loss limited to just the net cost.

Let's hope the only time I do open up a bull call position is the time it doesn't fall. Happy trading.

Disclaimer: All trades mentioned are real-life trades implemented by the author and is not meant to be taken as investment advice. When trading options, consider its risks and investment objectives. Speak to a licensed financial advisor or representative.