MyTradingBlog

Bidu is scheduled to report earnings in 2 days (Apr. 27th).  I usually don’t trade issues before earnings (too risky).  However, I placed some Bidu bullish trades today.

Today’s trade: Bidu spread: Long 135 call, short 140 call, expire in 4 days.  Spread cost: $4.15/pair.  Potential profit: $0.85/pair.

Here is the reasoning.

1. Here is my positions of bidu before my trades today: I am long bidu shares and short bidu Sept 105 call.  There is still 7.6% profit left (time value/margin requirement) for 4.5 months.  This is very safe (bidu has to drop $45 or ~30% before my profit will be hurt) but the return is no longer sexy anymore (annualized return of 20%).  (This is why I say I can nearly guarantee 10% or more return under the current market conditions).
2. The Chinese internet stocks, such as sina, sohu, have been reporting great earnings and the stocks have been soaring.  Besides, Bidu has been reporting great earnings in the past quarters and its chart looks picture perfect. The near term market condition is bullish (chartadvisor.com and schaeffersresearch.com)
3. Even if bidu misses and the stock drops, I will lose money on the spread that I created today.  But the Sept 105 call will also drop in price.  My plan, if this scenario plays out, is to roll up the Sept 105 call (a vertical roll up which will create more time value, hence create an annual return of more than 20%).  So this spread acts as a hedge.

Today is the last trading day of the week.  We are having a terrific week so far.  FFIV went up a lot, leaving my FFIV 95 calls expiring today in the money.  As a result, my long FFIV shares are making lots of money.  But since I sold FFIV calls at 95.  For every share of FFIV ($107.86 now), the money above 95 is not mine.  Some people may use this to argue against covered calls (covered call in its traditional sense has capped maximal profit).  But using the following strategy, you can still keep that profit.  Here is how (and this is what I just did today).

I placed a bull debit spread trade which was executed as follows:  buying back my Apr. 21 FFIV 95 at $12.42/sh, selling May 21 $95 calls at $13.52 with a net credit of $1.1/sh.  The total profit received today divided by the money I used (=margin maintenance requirement) = 3.72%.

Interpretation: Instead of buying the calls I sold for a loss, I rolled up my short calls to next month with a 3.72% monthly return (annualized return of ~45%).  If FFIV stays above 95 and if FFIV continues to have the current time value, I should be able to roll up month after month for a 3-4% monthly return.  Also keep in mind that this is a very safe investment.  Why?  Because my strike of 95 is ~12% in the money (ITM).  In other words, even if FFIV loses 12% of its value, it will still not touch any of my profit.  This is why I say using covered calls with modifications, you can make very handsome annual returns that can beat many Wall Street professionals.

One principle that I use when rolling up like this is that I almost never pay more money to roll up spreads, just in case the stock comes right back and fall below the strike price.

My other trades of the week, bull spreads of bidu, pcln, lvs and ffiv are making me very handsome money.  All these spreads will expire or be executed today.  Not counting my covered calls, just these spreads are making me more money than many people’s one year salary.