A little more than a week ago I initiated a bullish call calendar in CSCO with the idea that the stock would consolidate around the $23 level for a tad and I would look to help finance the purchase of calls for the company’s fiscal Q1 results on Nov 13th. The stock has sold off about 2.5% since putting the trade on, but the structure is only worth a few less than what I paid (below).
To manage this trade with one day to the short strikes expiration I am actually not going to do anything, and let it ride for one more day, if the stock is up and near 23 tomorrow afternoon I will then make the decision to cover.
But I am going to add to this position as I feel the stock has sold off in sympathy with competitors poor results like JNPR, and some suppliers/customers and the stock could be discounting the potential for their own poor results and/or outlook when they report Nov 13th. Either way I like the technical set up as the stock this morning nearly bounced off of massive support near $22, and think there is a distinct possibility the stock could run into their results which could give me the opportunity to spread the Nov calls that I am long or take some off of the table. Unless we see a broad market decline I would expect CSCO to hold $22 pretty firmly until earnings, and with implied vol bid for earnings these calls should carry pretty well.
ACTION: CSCO ($22.38) Bought Nov 23 Calls for .45
My previous position from Oct 16th:
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
On tomorrow’s expiration I will just be long the CSCO Nov 23 calls, for an avg of .475 as the Oct25th 23 calls will likely expire worthless.
Trade Rationale: The beauty of the prior trade structure is that the Nov 23 calls are now .30 lower than where they were on Oct 16th when I initiated the calendar, so by selling the Oct25th 23 call, I reduced my purchase price, I now think the stock bounces back to 23 prior to earnings and then I will have a bit of optionality so to speak!
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Original Post Oct 16th, 2013: New Trade CSCO: Chamber’s Pot
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.
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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.
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.
