New Trade CSCO: Chamber’s Pot

by Dan October 16, 2013 3:29 pm • Commentary

Last week (below) I looked at CSCO’s chart as an interesting technical set-up and mentioned that calendars may set up well in the name into earnings. With the stock back at its 200 day moving average and down on the day despite the market being higher we thought we’d take a shot on a calendar. This trade is playing off the assumption that CSCO doesn’t break down here but also doesn’t bounce much in the next week or so.

TRADE : Bought the CSCO ($22.98) Oct25th / Nov reg 23 call calendar for .50
  • Sold 1 Oct25th 23 call at .25
  • Bought 1 Nov 23 call for .75

Break-Even on Oct 25th Expiration:  

-Profits are maximized at $23. Slight moves above and below that strike are also profitable with big moves higher or lower putting the structure at risk of losses on expiration.

-Maximum risk is .50

Trade Rationale: Assuming CSCO stays range bound, this protects against decay for an earnings play by selling the weeklies. If CSCO stays near 23 in the next week we may look to roll to the Nov 8th weeklies. Earnings are just a few day before Nov expiration so those calls should continue to stay bid form a implied vol perspective.


Since reporting a lackluster Q4 and issuing disappointing Q1 guidance in mid August, CSCO shares have been down about 13% after making multi-year highs.  The one year chart below shows this morning’s breach of the stock’s 200 day moving average (yellow), a trend indicator that it has not closed below since Nov 2012.

CSCO 1yr chart from Bloomberg
CSCO 1yr chart from Bloomberg

The stock held today, but if CEO John Chambers comments from a couple weeks back on CNBC (here) about the health of the global recovery are also about the health of the company’s earnings visibility, then the stock could be at a pretty precarious spot.

The break out above $22 and above a multi-month consolidation in May on massive volume should serve as a very staunch support level for the near term, but that level is approaching quickly, with increasing volume on down days.

With the stock pausing at the moment at its 200 day moving average of about $23 and the all important $22 support/resistance level just a hair below current levels, I would be more inclined to enter as a long than press the short in front of their fiscal Q1 earnings due Nov 13th.  We are keeping a close eye on the quickly shifting sentiment in the name.

The chart below of at the money 30 day implied vol (blue line) vs the realized vol (white) shows IV quickly rising while realized has barely picked up, this has a lot to do with IV in the market picking up despite CSCO shares just grinding lower.  This set could make calendars look attractive, stay tuned.

CSCO Realized Vol vs implied Vol 30 day at the money from Bloomberg
CSCO Realized Vol vs implied Vol 30 day at the money from Bloomberg