Adieu Baidu

At PSW our motto is "Fun and Profits" and today we had plenty of both!

We've been shorting BIDU, XOM and RIMM all week, pouring 30% of our upside profits from a bullish virtual portfolio into these high flyers on the way up as we've been anticipating a break down pretty much like today's. 

While we expected the BIDU bubble to pop, we certainly didn't expect it to explode but that's what happened when this particular house of cards turned into a house of pain for the longs, who simply couldn't find enough buyers to take the stock off their hands at $350, $340, $330, $320, or even $310 a share as the stock simply collapsed in a very messy sell-off.

How did we get so bearish on BIDU?  Well, it all started with an iron condor play we took on October 2nd, following an analyst upgrade that sent the stock rocketing.  We took a few momentum plays in the morning but, by the afternoon I had a premise and a range that led to a box play on the stock:

Oct 2nd, 1:07 – "Lazy Condor play:

Buy BIDU $250 put, BDUVJ @ $1.45
Sell BIDU $270 put, BDUVW @ $3.50
Buy BIDU $340 call BPJJG @ $6.80
Sell BIDU $320 call BPJJC @ $12.10

You collect $7.35 and get paid between $262.65 and $327.05 with an outside risk of $12.65 and we can always adjust it if we have to."

There were, of course, several adjustments, too complex to go over but, needless to say, we took out our putter cheap and rolled out into very good positions for this little dip.  Here's an idea of how we ended up with one of the most profitable positions in PSW history:

Oct 3rd, 8:03 am – "Short-Tem BIDU – well I did a naked sell on the $320s yesterday for $21 but they scared the crap out of me with a huge volume bounce near the close so I lost my nerve and bought them back for $18. In retrospect I should have just shorted them as I would have been more willing to take my lumps (as I would DD or roll, something that’s not fun or smart with a $320 naked caller). I REALLY think $320 is out of control for them, pushing a $10B valuation (p/e 200) for a company that pulled in just .26 per share last Q and will be lucky to break $1.10 for the year. Even if they triple next year (not projected), you’ll be looking at (assuming they stay flat) a p/e of over 100 at the end of ‘08. It would take an uninterrupted tech rally of biblical proportions for them to keep going at anything near this pace."

Oct 4th, 5:59 – "Condors – if you look at them as a % of margin they can be quite sexy. I tend to look at them as a risk/reward strategy and generally don’t like them but when values get overstretched (like BIDU) and I can pull a ridiculous range ($267-$340) where the bet will be successful in 12 days, then I consider it worth it."

Oct 10th, 10:17 – "COME TO ME RIMM! WE ARE WAITING FOR YOU AT $110!!!"

Our RIMM shorts are a whole other story…

Oct 10th, 2:38 – "Sure thing short – I’m keeping after BIDU myself but it’s with the Jans ($300 puts) selling current $6 puts against (currently the $310 puts) and every time they lose $3 I roll both up $10. When it finally turns, I let the premium go and roll them to whatever Nov gets me an even roll (about $15 down), then I go through that cycle in Nov and Dec."

That's how we started that particular roll.  BIDU gained $20 into the close and that position was rolled to Jan $320s against the Oct $330s.  In the morning, BIDU gapped up another $15 and we decided to stick with the trade, flipping the very large Jan put position to $360 puts at 1:28, just as it broke $350.

Oct 11th, 9:30 – "Puts – I take 30% of my profits and buy puts in whatever seems most ridiculous (RIMM, BIDU, SU, XOM, DIA spikes), mainly I’m getting killed but the 70% of the profits I let ride, rather than cashing out, more than makes up for it."

11:28 – "Betting against big oil – I must emphasize that my plan is to take 30% of my daily profits and bet SOMETHING down. Whether it’s oil or BIDU or RIMM I’m chasing things that can snap back but the focus of the virtual portfolio is bullish (irrationally so!)."

1:28 – "BIDU finally falling – I’m in the $360puts now!"

1:34 – "BIDU – nice mo play on 320 puts, now $4.70, stop at $4.25 XXX"

Not every member gets in on every play so we try to find things along the way that can give latecomers an entry.  These puts finished the day at $22.10 (up 370%) but Parchesia and I agreed on the turn of the stock at 3:28 where we took the max profits for the day on our main plays right at the very top.

1:55 – "Woo Hoo – not looking so dumb now plowing 30% of my profits into BIDU puts huh?"

2:02 – "Rolled my BIDU $300 puts to $310 puts for +$1.80, tight stops now as I’m way ahead."

These were the dead end of our condor play as well as some new puts that we had given up on.  They finished the day at $16.75, down from $20 at the top and up over 300% for the day.

2:11 – "$330 SHOULD make some kind of floor. If not, look out."

2:11 – "Next move it to sell the current $330 puts for $11.50 (no less than $10 but whatever by EOD) then roll myself to the Jan $340 puts and capture than $10+ premium and roll that caller to Nov puts that are even further down the line. My $310 puts act as protection in case this thing goes back to $250."

Those $330 puts finished the day at $30, sold against what were effectively free Jan $340 puts, that were rolled into at $48.17 to take advantage of a possible bounce.

2:58 – "China sector heading back down. This may not be over! If BIDU breaks $320 downside, I like the $290 puts as a mo play, probably $5, stop at $4 XXX"

The $290 puts peaked out at $10 just 30 minutes later and finished the day at $7.65, a nice 50% gain even for the people who held it into the close.

3:15 – "Pre-Rolling BIDU puts to $280 puts at $3.50 (which means very tight stops on $290 puts), will keep laddering every $5 if it keeps going."

This is the strategy we use to maximize profits on a strong momentum play.  We take the position we intend to roll our profits to long before we are done with the primary position.  We then set tight stops on the primary position (generally we prefer that the profits from the primary already cover at least 1/2 of the roll for safety) so we can maximize profits.  The $280 puts finished at  $4.05 after topping out at $7 but the point was to let us take the $310 puts off the table without feeling like we were going to miss anything!

3:26 – "BIDU – selling $300 calls for $19.50, will cover if I have to with Nov $320s but I’m betting not."

3:28 – "Oops, cancel that, it turned."

3:58 – "At this point, staying short on FXI and BIDU is speculative. I’m leaving some in of course but it’s only about 25% of my profits (which, with BIDU, is more than I had at the beginning of the day in total!)."

Needless to say, our members were pleased:

FP  October 11th, 2007 at 4:04 pm | Permalink 

"Phil, Sold my BIDU 320’s from 11 to 35. Awesome… Holding overnight BIDU 290 puts."

Greg October 11th, 2007 at 4:07 pm | Permalink   

"Thanks Phil for advising cash and caution, I had repositioned from 30% cash to 65% cash before the dump today. Also bought some puts right when dump started, sold 1/4 for a 5 bagger holding the rest till tomorrow. Thanks again!"

My thanks to all of you who helped make this such a fun day.  Steering through reverals is a tough business but the group we have makes it not only easy, but fun as well – and that's what it's all about! 

I'm sure some other stuff happened in the markets today but we'll deal with that tomorrow.  Sometimes it's good to just sit back and enjoy the day…