On a Friday afternoon, try opening Interactive Brokers, watching the Baidu options chain for 45 minutes and debating with yourself whether to trade or not, whether you want to trade more or less, whether you want to trade for longer or shorter, whether you want to play with the volume in the trade or simply do the thing, and then, with more mental discussion than I give my choice of apartment, you place a trade that, to your mind, isn’t all that remarkable, one contract, $600 in premium. I sold 1 BIDU put August 14, 2026 at $80 with an expiration date of June 17, 2027, for a premium of $6.00 per share. That’s one options contract where a person has 100 shares of exposure, and he has $600 of credit (before commissions), and I want to explain it to you in this super-obsessive detail because this is the reason why I think most explanations of cash-secured put selling either gloss over the mechanics or completely leave out the reasoning that matters. I think Baidu Ai and Robotaxi will create more revenue and increase the possibility of P/E ratio.
Let’s get it real. The Setup, With Numbers That ACTUALLY MATTER.
At the time of this writing, Baidu was trading around $105-$110 a share. The stock is trading on a true 52 week range of nearly 19% from $84.64 to $165.30 year to date. That sort of range tells you two things in one go: The stock is truly volatile, which means that option premiums are going to be higher; and the market has been meaningfully re-rating the company’s valuation over the last year, which is exactly the type of scenario in which selling a put would be profitable if you have strong conviction in the underlying business. My tool shows that Baidu’s stock rating is 4 points, but the option price is 20% lower than the current stock price, so it’s very safe.
I chose a strike price of $80, which was below the current 52-week low for the stock, and an expiration date 10 months in the future, June 2027. Because the amount I get paid for a strike minus what I collect in premiums is my break-even point, it comes out to be $74 per share. That’s a margin of approximately 30% above entry price in a full assignment scenario, and that’s a pretty generous cushion before this trade turns into a loss for me, even in a full assignment scenario.
The new brand of “AI for the future,” created by the Chinese tech giant called Baidu, is worth exploring.The new “AI for the future” brand made by Chinese tech giant Baidu is worth exploring.
This is a question that I think needs to be answered directly, as there’s no point in sugarcoating it. I could have been selling puts on numerous other names the week that I did this trade, and I specifically didn’t do it, for reasons that are more important than “BIDU looked interesting.
I examined other big cap techs that week with high implied volatility and most other big cap techs were still trading at higher multiples than they’ve traded in the past which meant that the premium that I would receive for assuming the assignment risk was not enough to make up for how expensive the stock was. A put that is sold on a high price stock is the equivalent of getting paid to buy something that is still too costly upon expiration.
There were two things I cared about that were different about Baidu. First, the market’s valuation of the stock was at around 1.9x, well below the peer group average of around 4.3x, so there was a real sense that the market was pricing in real pessimism, not just normal volatility. Second, the balance sheet provided me with real downside protection in addition to the stock price: $16.95 billion in cash and $13.65 billion in debt, which left a net cash balance of approximately $3.30 billion or about $9.70 per share. Again a carrier that can withstand a rough period without risking its very survival—which is the sort of base I want to be tied to if I have to be pushed to it.
Also, I specifically excluded names that don’t have a near-term catalyst, to justify high premium. This trade was bought on the day of the earnings announcement, which came on August 18 as I was putting this trade in, and the report indicated that it was a 5.8 percent move or so that was factored in at the time. The additional implied volatility in the lead-up to a binary event can only lead to an increase in put premiums; I was looking to sell a put on a day of no action with an unobjectionable premium. The tradeoff was the fact that I’m taking real earnings-event risk into a trade that I had made my decision to take no matter the outcome. This isn’t a mistake, it’s a decision.
The Complete IBKR Walkthrough, Click By Click
I use Interactive Brokers specifically because of the fact that I can trade there for a low commission and the fact that they have a pretty deep infrastructure in terms of options. And I want to go through precisely how this trade is placed, and it’s quite different from other apps that are more retail where they do some sort of trade for a flat fee.
Getting options permissions to begin with. IBKR offers four tiers of options trading permissions—most brokers offer just two or three. What I did was a trade in Tier 1, and sometimes referred to as “Limited,” these are covered calls, protective puts, and cash secured puts, specifically. The application process is through Client Portal, Settings, Trading Permissions, Options. While most successful platforms approve higher-level accounts on the basis of your trading history and financial data once you meet their standards, IBKR is slightly more conservative than Webull and much more generous than other platforms in their decision to approve you for higher levels of trading (spreads or naked calls).
Selecting your platform, as IBKR offers you options here that matter. Because I do that via Trader Workstation, TWS, instead of the simplified Client Portal layout, or IBKR’s mobile app, TWS Classic offers a far greater amount of order control and real-time Greeks displays that are just plain easier to access. As a newcomer, the options interface of IBKR Mobile or IBKR Client Portal is actually usable and less daunting, but the more positions you add, the more the learning curve for TWS will pay off. You need edit your option level before sell put, if you can’t find it, read how to use IBKR.
Pulling up the options chain. In TWS, I open the BidU ticker, right click and choose “Option Chains”, or go to the OptionTrader tool in the Trading menu and it will format this information into a grid with current bid/ask/grieks displayed in the same row. I looked for the June 2027 expiration cycle and then I scrolled down to the $80 strike, and took note of the delta reading as well as the bid-ask spread before making any decision.
Checking the cash secured structure. This is very important and treated a little differently by IBKR depending on account type. With a standard cash account, or with a margin account in which you have designated the put as cash-secured, IBKR reserves the entire $8,000 obligation, plus the strike price times 100 shares, and doesn’t let them be used for other trades until the position is closed or expires. I want to emphasize this because with a Reg-T margin account, IBKR’s system will allow you to sell puts with a lot less buying power than the $8,000, and that’s where people get over-leveraged. I have the full $8,000 set aside in the exact same way that I would set a stop loss to purchase 100 shares at $80 – it is exactly that.
Placing the actual order. By right-clicking the particular $80 put contract in the chain, a “Sell” option appears, which will fill an order ticket. Depending on the order type used (Limit or Market), options spreads, especially on a name such as Baidu (not as tightly bid/asked as SPY options), may be so spread out that a market order could result in a substantially inferior fill. I placed my limit right in the middle of the bid/ask range and waited for it to be executed. It was filled in a matter of minutes at my price of $6.00. As shown in the following figure, this is the PC interface. If you use phone, it’s the IBKR mobile guide.
For completeness’ sake, commission cost. This tiered commission system for IBKR Pro costs about sixty-five cents in commission per contract on stock trades, which is small in relation to the premium, but is important to know what you’re paying the full price of the commission would be a plug-in fee that some competing platforms claim to be free.
Because “I Got $600” is not Analysis, we must calculate My Actual Return.
With 600 dollars in premiums and $8,000 in reserved capital, that’s a 7.5% return on capital over the approximately 306 days from the date the policy was traded until it expired. This works out to about 9% per annum, when annualized as the period return times 365 days/period. This is what I get for the put if it does not go through, which is to say that by June 17, 2027, Baidu is above $80 and I hold the entire premium without any other liability.
If it is assigned instead, then my cost basis in the shares is $74, which is the strike price minus premium I collected, which is about 30% less than the price of the stock when I bought the stock. In my opinion, either way is a fair outcome for the underlying thesis, and that feeling of ‘I’m fine either way’ is the best gut-check of whether or not a cash-secured put is well-structured in the first place.
How This Approach Applies To Safer Dip-Buying
The overarching lesson I would hope any reader would get from this is about the discipline, not specifically the Baidu stock. The traditional dip-buying strategy is to watch a stock fall and then buy it at the very bottom of its range – without a set dollar amount in mind – and with very emotional reasons for buying the stock. When you sell a cash-secured put you are making the “other side of the deal” – you are making the decision to try and enter at a specific price, you are getting paid for making that decision, and then you wait for the stock to come to you at a price you had already considered as reasonable.
The “safer” part is from three disciplines that I do not compromise on. Strikes need to be meaningful, not just on the edge of the money, below the current price to create some real cushion against short-term volatility. The positions should be cash secured and not to be margin called in case of a sharp drawdown, or else become a margin call on top of a market move and a stressful situation. And the underlying companies must have balance sheet strength to weather a bad stretch, as an assignment would be a purchase of the equity, not simply the option.
How to get a high win rate without sounding like a crazy person!
The following are some rules that I personally use and have learnt some of these the hard way after a few trades. The range of my strikes is in the vicinity of 0.15 to 0.30, which is the same as a 15% to 30% chance that the contract is in-the-money at expiration, and IBKR’s options chain shows this straightforwardly, so I feel I am getting a real statistical advantage, and I get some premium at the same time. I have a variety of expirations all over the calendar, and I don’t focus on one event to force all my open positions into one area, so that when one position reacts badly on earnings or a macro shock, I’m not at risk with a bunch of other positions open that expire at the same time. I only sell into elevated implied volatility in advance of binary events – like I did here with Baidu’s earnings – on names I’ve done the work on myself and feel comfortable owning the stock either way they play out, not just to chase a fatter premium number on a name I haven’t done the fundamental work on.
The honest-to-God truth:
There’s genuine China-specific regulatory risk that is not filtered through the typical US equity analysis, with exposure to the more general US-China tech-related tensions that have historically driven Chinese ADRs apart from their company fundamentals. Trailing 12 months free cash flow is negative, hovering around negative $1.39 billion, due to a raft of AI infrastructure capex and this needs to decelerate over time to maintain the long-term thesis. My $8,000 in capital that I’ve set aside is very real, even if my trade does exactly what it is supposed to do — and I am talking about opportunity cost of that money that I can’t use for ten months.
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