Bull spread to hedge against a Bidu drop

Posted on April 27, 2015 by admin

BIDU is reporting earnings on 4/29/15.  How to deal with BIDU (and other stocks) earnings report?

I have a BIDU covered call (long BIDU shares and short BIDU options, exp. 5/1/15 strike 215). BIDU is up today and trading at ~222.  To protect a downside drop of BIDU, I set up a BIDU calendar spread (I sold BIDU 5/1/15, strike 240 and bought 5/1/15 strike 242.5 for $.25/share).  Here are the possible scenarios of BIDU post earnings:

1. BIDU price range, $215-240: My original BIDU covered call is safe and my additional bidi spread will all expire and I’ll keep the spread premium.

2. BIDU price above $240, My original covered call is safe and I’ll buy back BIDU 240 strike and sell a higher premium/higher price option of future expiration.

3. BIDU drops below $215: all options expire.  I’ll keep the premiums of all options.  I will not sell BIDU shares and will sell more options next week.

About admin

Richard Cheng, M.D., Ph.D., is an avid Wall Street investor with 20+ years of investing experience. He is specially adept at observing the world to find the patterns and then design strategies to win his battle. Most, if not all, happenings in the world, follow certain patterns. These patterns may be complex, multi-factorial, not so intuitive at the first glance, or even may appear chaotic. However, even chaos has its own patterns. If you pay attention and be patient, you'll find them and then you will gain an upper hand in your battle. Using this blog space, he documents his trades and his thoughts as they happen. He uses this blog as a a notebook to help him better refine his strategies. Hopefully this will help you as well. Good luck in your trading.
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