Chinese search giant Baidu (BIDU) has just completed a head and shoulders pattern, undoing its recent gains and now trades back at a five-month low. One trader now sees the potential for a bounce higher.
That’s based on the July $185 calls. Over 10,197 contracts traded against a prior open interest of 299, for a 34-fold rise in volume. The buyer of the option which has two months to play out, paid about $13.50 for the contract.
This is a slightly in-the-money trade, as shares recently traded around $186. That’s still far below a peak price of $354 that shares traded at in early February.
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In addition to declining following a classic head and shoulders pattern playing out over several months, shares have dropped to their 200-day moving average. And in the past few sessions, shares have been trading right around oversold levels based on relative strength. These patterns support the notion of a rebound, even a small one, in the coming weeks.
Action to take: The at-the-money strike price makes this trade look attractive. With two months to play out, however, time decay will set in on the trade shortly, so the sooner and stronger a bounce is, the better.
Traders can buy into this option, but should look to take quick profits with mid double-digit profits of higher. That can still generate some decent returns based on the price of the option.
Disclosure: The author of this article has no positions in the stock mentioned here, but does not intend to make a trade on this company after the next 72 hours. The author receives no compensation from any of the companies mentioned in this article.