2nd Trade Update Aug 15th, 2012 at 3:23pm: Ok as many of you who have been following my posts on this trade, I clearly F’d the thing up from the get go, my timing was worse than poor, even-though I suggested it was not a high conviction trade, but I then compounded the problem by adding to the Sept Put Spread by buying a higher strike Put when the stock rallied a dollar in my face in just a week. At the time I also mentioned that adding to the loser was undisciplined.
SO at this point if I were to adjust again, many of you would want to sit me down and have a little intervention, but don’t worry, we will save that for another day.
If I were looking at the stock now less than an hour before the print with a fresh set of eyes, my general skeptical nature would suggest that the 17% rally in the shares in the last 3 weeks takes what at one time was a very low bar for the quarter and raises it dramatically. BUT the stock is not going to trade on the quarter just ended, the company had already lowered guidance, so they are likely to meet or bear, it will obviously trade on Fiscal Q1 and 2013 guidance. After reading through many of the Street’s previews and reviewing some competitors recently announced results I think it is safe to say that no way is expecting a meaningful bump to guidance, so the net of it is that the bar is still fairly low.
LIKELY SCENARIOS:
Bearish:
1. IF the company lowers guidance below consensus I see the stock down below 16, which would be slightly above the implied move.
2.If the company misses, guides down, and seems downright perplexed by the macro environment and results speak to market share losses, I think the stock trades right back to the 15 level where it was trading in late July.
Bullish:
1. Company bears Q4, raises Q1 and 2013 and the stock Fills in the entire Gap from the Q3 miss and trades above 19.
2. Company reports in-line qtr, guidance is basically in-line with guidance and consensus and the stock trades btwn 17 and 18 consolidating recent gains.
SO WHAT TO NOW WITH MY LOSING POSITION?
RATHER THAN FURTHER COMPOUNDING A LOSER, AGAIN, I AM GONNA STICK WITH WHAT I HAVE, I AM RISKING WHAT I AM WILLING TO LOSE.
BUT If I was looking at this with an entirely fresh set of eyes, I would probably be pretty tempted to buy the move, which now sits at about 6.5%, it has ticked down a bit in the last 24 hours.
This would probably be the way to do it playing for an out sized move:
CSCO ($17.50) Buy Aug 17/18 Strangle for .55
-Bought 1 Aug 17 Put for .27
-Bought 1 Aug 18 Call for .28
Break-Even on Aug Expiration:
-Profits above 18.55 and below 16.45
-Losses of up to .55 btwn 18.55 and 18 and btwn 16.45 and 17
TRADE RATIONALE: The move seemed cheap when I looked at it yesterday and is only cheaper now, JDSU results last night has given the telecom equipment space a bid coupled with AT&T’s acknowledgment that they are leaving capex spending where it is.
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"]
[/caption]
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