I’ve been waiting for the right moment to offer up a trading idea on today’s gem of a stock. iQiyi (NASDAQ:IQ) offers online video streaming services in China. The company when public in April for $18 per share. IQ stock more than doubled in less than two months, then came tumbling back down. Chinese stocks might have a bad reputation on Wall Street right now, but you need to snap up IQ stock quick.
You might be asking why? Why, with all the political nonsense, tariffs and posturing between the U.S. and China, should I buy IQ or open a bullish options trade on the stock?
The answer is simple: IQ doesn’t need the U.S. market. At least not yet.
The company has posted considerable growth within the borders of China so far. As Laura Hoy recently pointed out, IQ subscribers have grown from 10 million in 2015 to 50 million by the end of 2017 last year. “To put that into perspective, that’s around half of Netflix’s subscriber count and IQ only operates in one country,” Laura noted.
Remember, China is a country with billions of people and a robust and growing middle class. IQ’s 50 million subscribers is only the tip of the iceberg. There’s so much more growth to be had.
As IQ grows, it will garner more attention from the brokerage community. Right now, only five analysts follow IQ stock — doling out four buys and one hold. The consensus price target rests at what many would consider a ridiculous target of $155. IQ opened trading at $33.50 today, meaning analysts believe the stock could rally nearly 370%.
For a company with about half Netflix’s subscribers that hasn’t tapped the international market yet, $155 may be conservative.
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Technically speaking, IQ is holding up rather well despite falling off sharply from it’s early June highs. The shares have found support near $30, and now that they have worked off their overbought issues, it’s now time to head higher.
Turning to the options pits, there is some health skepticism lingering for IQ stock. It seems the recent plunge in the shares and the negative sentient surrounding China has left a lasting impact.
Currently, the July put/call open interest ratio comes in at 0.87. In other words, puts are nearly as popular as calls among front-month IQ options speculators. This hesitance is understandable in the current market, and health from a contrarian investing perspective.
As for implieds, July options are pricing in a potential move of about 12% for IQ stock heading into expiration. This puts the upper bound at $36.40 and the lower bound at $28.60.
2 Trades for IQ Stock
Call Spread: Traders looking to profit from a renewed rally from IQ stock might want to consider a July $35/$37 bull call spread. At last check, this spread was offered at 40 cents, or $40 per pair of contracts. Breakeven lies at $35.40, while a maximum profit of $1.60, or $160 per pair of contracts — a potential 300% return — is possible if IQ stock closes at or above $37 when July options expire.
Put Sell: On the other hand, if you are looking for a less volatile trading strategy, then a July $25 put sell has an excellent chance at finishing out of the money. At last check, this put was bid at 55 cents, or $55 per contract.
In this trade, you keep the premium as long as IQ stock closes above $25 when July options expire. On the downside, if IQ trades below $25 prior to expiration, you could be assigned 100 shares for each put sold at a cost of $25 per share.
As of this writing, Joseph Hargett owned IQ stock.
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