How to Invest in Baidu (NASDAQ:BIDU)

Baidu.com, Inc. (ADR) (NASDAQ:BIDU) is the largest provider for Chinese and Japanese language internet search services.  They rival Google in those countries and have become a household name.  Investing in shares of Baidu can be tricky, but let us outline a stargety that afford you some protection and earn your profit up front on the stock.

Based on rates recently checked, buying 100 shares of Baidu.com, Inc. (ADR) (NASDAQ:BIDU)  for $109.96/share and then selling the $110.00 January 2011 Call contract for $8.90 could net you 8.85% profit if BIDU closes above $110.00/share at the expiration date in 79 days.  Not bad for 3 months of investing and your average monthly gain would be 3.42%.  Additionally, you would have a big downside protection to $101.06, or about a 8.1% drop in stock price.

The Compound Annual Growth Rate (CAGR) on the assigned option position is 48%, which is better than the average overall long term market return of 10%.

Possible Strategy if BIDU drops 8.1% and closes below $110.00:
If BIDU closes below $110.00 at any time during the trade, you can roll down the position by purchasing back the $110.00 January 2011 Call contract and then selling another call at a lower strike (say the $100.00 strike) and/or further date out to make up for any losses caused by having to buy the $110.00 January 2011 Call back.  If the stock recovers, you likely can simply sell out of the position for close to even money if you don't want it tied up in the positions.

If shares of Baidu.com, Inc. (ADR) (NASDAQ:BIDU)  continue to drop, you now own the stock for less than $101.06/share when you were originally interested in buying at $109.96/share.  That afford you some comfort in investing.

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Baidu, Inc. provides Chinese and Japanese language Internet search services. Its search services enable users to find relevant information online, including Web pages, news, images, multimedia files, and blogs through the links provided on its Websites. The company also offers online community-based products and entertainment platforms; an instant messaging service; and a consumer-oriented e-commerce platform.  The company was formerly known as Baidu.com, Inc. and changed its name to Baidu, Inc. in December 2008. Baidu, Inc. was founded in 2000 and is headquartered in Beijing, the People's Republic of China.

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