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Great Expectations

One of the things I like most about "Options Action"is that we talk about making money even when stocks do nothing. Case in point: Baidu. Last Friday, we spotlighted some of the large cap tech names where the options market was overpricing stock moves heading into earnings. We referenced Apple , Yahoo and Google as examples of stocks that despite high expectations from options traders, had relatively muted moves when the moment of truth arrived in the form of earnings. And we also talked about how a similar dynamic was playing out with Chinese internet search giant, Baidu. The options market was implying a 10% move for the stock post earnings. But since reporting, it has only moved 2%, meaning volatility was left on the table. More simply put, all the good news appears priced into Baidu, despite what the options market may say.

To profit from this phenomenon, Dan Nathan, the newest starof the cable news sensation we simply call "O/A," suggested selling the May 185/240 strangle for $10, or 5% of where the stock was trading.

So now what? Nathan suggests covering the May 185 put, buying it back for about $1, or $3 bucks less than what you could have sold it for. As for the upside call? He says keep that part of the trade on, and use the $5 that you collected selling the 240 call as downside protection, essentially changing the trade to a buy-write through May expiration.

Questions, comments send them to us at: optionsaction@cnbc.com

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  • Melissa Lee

    Melissa Lee is the host of CNBC's “Fast Money” and “Options Action.”

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