New Position Established in Baidu Inc.

A new 100% Cash-Secured Puts position was established early in the trading session today in Baidu Inc. (BIDU). Three April 17th, 2020  $90.00 100% Cash-Secured Puts were sold at $1.95 per share when the stock price was $96.14.  Baidu was trading over 5% lower this morning on news that China’s internet regulator ordered the company to clean up improper information and halt the spread of “low-brow content” (the company said it would suspend operations of some mobile app channels).  Because of the sharp decline in the stock price this morning, the Implied Volatility of the Put options had spiked up to 70.8 when these Puts were sold. 

The Covered Calls Advisor views Baidu when below $100 as extremely undervalued.  Current fundamental valuation metrics such as price/sales ratio are at or near historic lows.  There are over 30 analysts currently covering BIDU and their average target price is about $150.  Like Alphabet in the U.S., Baidu is the dominant search engine in China with about 70% market share and about 400 million monthly active users (more than the total population of the U.S.).  Baidu Maps is also #1 in China with almost 300 million monthly active users and it is also a leader in areas with future high growth potential such as speech and facial recognition, streaming entertainment, and autonomous vehicles.            

As detailed below, the potential return-on-investment result is +2.2% absolute return in 10 days (equivalent to a +79.1% annualized return-on-investment).  This provides a very attractive return-on-investment potential given that a conservative position with a strike price 6.8% below the stock price was selected for this position.


Baidu Inc. (BIDU) -- New 100% Cash-Secured Puts Position

The transaction was as follows:
04/08/2020 Sold 3 BIDU April 17, 2020 $90.00 100% Cash-Secured Put options @ $1.95 per share 
Note: The Open Interest in these Puts was 866 contracts

A possible overall performance result (including commissions) would be as follows:
100% Cash-Secured Cost Basis: $27,002.01
= $90.00 per share * 300 shares +$2.01 commissions

Net Profit Components:
(a) Options Income: +$585.00
= $1.95 * 300 shares
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If Baidu is above $90.00 strike price at Apr 17th expiration): +$0.00
= ($90.00 - $90.00) * 300 shares

Potential Total Net Profit (If Baidu is above $90.00 strike price at April 17th options expiration): +$585.00
= (+$585.00 options income +$0.00 dividend income + $0.00 capital appreciation)

Absolute Return: +2.2%
= +$585/$27,002.01
Equivalent Annualized Return: +79.1%
= (+$585/$27,002.01)*(365/10 days)