Trade Update Aug 6th, 2012: Since buying the Sept put spread (detailed below) last Thursday, CSCO has rallied 6% and the structure has lost half of its value. My conviction level and the trade bias has not changed as a result in the almost 3.5% rally in the Nasdaq in the same period of time, nothing has changed other than market sentiment. I want to go back and remind myself of what I said Thursday in an effort not to treat this current loss as anything more than it is a low conviction trade gone bad in the short term.
From original post:
My View: I want to make a low premium, defined risk directional bet that CSCO misses and guides lower and the stock re-tests the 52 week lows. I want to be clear here, I would not short a cheap stock like this with some of the positives that I mentioned above, But I will allocate some trading capital to the idea. This is not a high conviction trade as I will need a lot of things to go wrong in a short period of time, but I like the risk / reward set up, risking .35 to make 1.65 if the stock matches the 2011 low following what has been a historically volatile event for the company.
Now I have been doing this a while, and I clearly recognize the fact that if the market is going break through 1400 and possibly make new highs in the days/weeks to come that it will need some broader participation from some large components. Investors are underweight large cap tech losers like CSCO, DELL & HPQ, and given the relative underperformance of late, and cheap valuations, they are not difficult names for PMs at large funds to add to in an effort to play a little “catch up” with.
My trade, while clearly wrong for the time being, will likely now take a little tweaking to break-even and be profitable. Some traders I know well (Enis and CC to name a couple) don’t generally like to add to losing positions, but I tend to be a bit more impetuous, especially when I think the stock has moved on air. At this point with the Sept 13 Puts offered at .03 (I sold them against the 15s at .10), I am going to cover them as they have a 3 delta.
ACTION: CSCO (16.80) Sept 13 Put Buy to close for .03. Now I essentially own the Sept 15 Puts for .38
But I am also going to Buy Some higher Sept Puts to capture a potentially negative move following earnings.
New Trade: CSCO (16.80) Bought to open the Sept 16 Put for .42, I will look to spread this if and when the stock retreats into earnings.
I know I am being a little undisciplined by doubling down, but I am going to just stick my toe in the water a bit and buy a lesser amount of the Sept 16 Puts than I own of the Sept Puts 15s. My conviction level isn’t any greater now, but if the company does what I thought they could do last week, the likelihood of a drop in the shares in my opinion increases with the stock higher now.
Original Post: Aug 2nd, 2012: CSCO: Fiscal Q4 Miss and Weak Forward Guidance Should = New 52 Week Lows
Technology shares over the last year or so has been a tale of two cities as it relates to performance (think Detroit=CSCO and Beverly Hills=AMZN). Those with perceived product cycles no matter how expensive have out-performed, and those who rely on legacy stodgy ol’ tech products for most of their sales have gotten drilled no matter how cheap.
Event: CSCO will report their fiscal Q4 on Aug 15th, and while I don’t have any particular insight into the quarter and guidance for fiscal 2013, my sense would be that they will both be less than stellar. Options market is implying about a 6.5% move vs the historical avg of about 6.5% over the last few yrs.
Bull Case: Bulls will point to the stock’s 2% dividend yield (which should go up soon), solid balance sheet (net cash position of 38% of their market cap), and valuations well below peers and well below the market multiple, oh and massive buy back that is also only likely to increase as the stock goes lower.
Sentiment: In this market that trades within just 5% of the April multi-year highs, winners are being bought up to new highs and losers are being sold to new lows, without care of valuation. Wall Street analysts still fairly positive on the name with 30 Buys, 16 Holds and only 2 Sells.
Technicals: The chart has been in a massive downtrend since the late 2007 top, and not likely to be resolved until we get a massive flush to the low end of the channel.
[caption id="attachment_15159" align="aligncenter" width="589" caption="CSCO 5yr chart from Bloomberg"]
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My View: I want to make a low premium, defined risk directional bet that CSCO misses and guides lower and the stock re-tests the 52 week lows. I want to be clear here, I would not short a cheap stock like this with some of the positives that I mentioned above, But I will allocate some trading capital to the idea. This is not a high conviction trade as I will need a lot of things to go wrong in a short period of time, but I like the risk / reward set up, risking .35 to make 1.65 if the stock matches the 2011 low following what has been a historically volatile event for the company.
Trade: CSCO ($15.76) Bought the Sept 15/13 Put Spread for .35
Bought 1 Sept 15 Put for .45
Sold 1 Sept 13 Put at .10
Break-Even on Sept Expiration:
-Profits btwn 14.65 and 13of up to 1.65, max gain of 1.65 at 13 or below.
-Losses of up to .35 btwn 14.65 and 15, max loss of .35 above 15