Trade Highlight #8

Due to my investment in the Chinese internet giant Baidu, I’ve kept an extremely close eye on the company. My position of 40 shares is in the red, about $1000. Here is how I got a big chunk of that money back with a Naked Put, within just seven days.

Last week we discussed a naked put option on a real estate company. You can read this post via this link. To see the details about that trade go to #88 on my Options Page.

Introduction

Here is the opion that I will discuss this week:

-P BIDU 15 JAN 2021 $100 $18,50

You can find the details about this trade on number #110 on my Options Page.

The date is August 14th, I’m in France, Normandy, specifically Saint Michel. Its a beautiful place, very authentic, busy and unfortunately there was hardly an internet connection. However I managed to check my brokerage account real quick during the day.

Saint Michel, Normandy, France.

After logging in to my account I saw that the share price of Baidu (Ticker: BIDU) had dropped to around $95. As a shareholder of 40 shares of Baidu I had seen the price decline all the way from $170. Earlier it had already come down from $300. Knowing the business and enviroment I decided that it was barely impossibile for the stock price to tank further, due to investments and the cash position of Baidu. The main business, internet search and ads, were being valued at about $15 billion.

Background information

At a stock price of $95, my shares were in the red for a total amount of about $1000. I decided to double down and to sell a put (the obligation to purchase 100 shares in January 2021 for $100 per share). I figured the stock price would definitely rebound in two years time and selling a put ITM (in the money) provided me more premium.

The lucky factor of this trade is that on Monday the 19th of August, there was news about the trade war and this story was published. All Chinese internet stocks gained and Baidu gained about 8% that day, pushing my option OTM (out of the money). At that point I’d gained $300 of profit on the option contract.

However, I knew that on that same Monday, after the market would close, Baidu would present its quarterly numbers. I decided to gamble, as usually earnings release provides stability to a stock. Everyone knows what is up with the company and so volatility could drop, which also makes the option premium drop. Anyway, the earnings were decent (better than expected) and thus the stock went up another 7%, pushing the price all the way to $115.

I didn’t directly manage to buy back my sold option contract as my price target didn’t get hit. But surely, the next day my order got filled to buy back the contract for just $13,45. Providing me a total gain of $502,22 or €442,76 in a total of just seven days time, while being on vacation!

Long story short

On August 14th, while being on vacation, I sold a naked put on Baidu, a stock that I had owned for a few months already. I was prepared to wait out my time to take a decent profit. However, I got lucky with trade war news and earnings and I managed to gain €422,76 in seven days (five work days) time, while being abroad for my holidays.

To find more information about options CLICK HERE.

For any questions regarding options, leave them down below in the comment section or simply hit me up on any of my social media channels!

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.

4 Comments

  1. Livio

    Nice way to recover some of your losses on your stock position with options that quickly. I might have to start learning more about them myself too.

    • DutchIndependence

      Thanks, I know options and derivates in general can seem quite risky. But when you fully understand the product and you’ve been exposed to the financial markets for a few years it could really be beneficial to get familiar with them. Best of luck to you!

      DI

  2. That’s an interesting trade. Considering you were speculating on the price to go up, is there much difference between selling an ITM put or buying an ATM/OTM call? Both seem to be able to get the job done, right?

    Looking forward to the options 101 page.

    • DutchIndependence

      Hi SD, it really is a different play. Basically I gambled without having a margin of safety, something really had to change for me to make money. Normally I make sure the stock can go up, sideways or 10% down before I am in ‘trouble’. The difference in my thinking was that Baidu was not able to go any lower. If it would have gone lower I would have a lot of months of time to wait it out.

      Selling the ITM provides you with more premium because there is more risk. Also the premium declines quicker when the option contract will reach ATM or OTM status. The further the stock goes OTM, the premium will decline slower and slower.

      Thanks for your comment mate!

      DI

Next ArticleOptions 101.1