4th Trade Update $CSCO: Closing Nov Call Spread For Gain Prior to Earnings

by Dan November 13, 2013 2:14 pm • Commentary

After a couple iterations of the original bullish CSCO trade from Oct 16th (below) I am going to now close the remaining position as we head into tonight’s earnings report.  For my trade the the risk/reward doesn’t really line up to remain long, as I said in yesterday’s preview:

That being said a beat and raise above expectations, which happen to be fairly low despite last quarter’s guide down could result in a 10% move back towards the 52 week highs, while a second consecutive cut in guidance would see the stock break recent support at $22 and possibly have the stock moving back towards the May breakout level of $20.  As stated above though, with the stock in the mid point of the 6 month range, an inline quarter and guidance would likely result in the stock under-performing the implied move.

After legging into a very cheap $1 wide call spread for .08, that can now be sold at .58 for a .50 gain, I am going to do that as it seems a bit binary to sit with a .58 bet to maybe make another .42 if the stock happens to go up in what could be a potentially volatile event.

Action: Sell to Close CSCO ($23.82) Nov 23/24 Call Spread at .58 for a .50 gain




Prior Post Nov 7th, 2013:  3rd Trade Update $CSCO: Spreading Nov Calls, Creating Cheap Spread Into Earnings

Yesterday I sold half of my long Nov Call position in CSCO (see below) locking in some gains on the stock’s recent rally, and I am now going to spread the balance by selling a higher strike call in Nov to create a call spread.  The idea here is that I reduce my break-even, thus reducing my risk, but limiting my profit potential.  With earnings next week, the idea of laying off some risk but staying in the game seems like a conservative way to play after the stocks recent gains.  Expectations for a beat raise might be overly optimistic.  

Action: Sell to Open CSCO ($23.38) Nov 16th 24 call at .40
New Position: Long CSCO Nov 16th 23/24 call spread for .08

Break-Even on Nov 16th Expiration:

Profits: Max gain of .92 at 24 or higher

Losses: max risk of .08 below 23




Previous Post Nov 6th, 2013:  2nd Trade Update $CSCO:  Closing Half Nov Call Position For Gain

Almost 2 weeks ago when CSCO bounced off of key technical support I doubled down on my long call position when the stock was 4% lower, but the calls that I bought have now appreciated by almost 75%.  As my friend Stephanie Link, Co-Portfolio Manager of the Action Alerts Plus portfolio, and shareholder of CSCO said yesterday on her service about a very important networking product CSCO is launching today:

The company will unveil its new data center strategy and new ethernet switches from its Insieme partnership (84% owned by CSCO) that combines software and hardware and better addresses the competitive threat from Software Defined Networking (SDN).

CSCO’s products, strategy and delivery tomorrow will be key for the shares near term because SDN has been one of the major overhangs for the company. SDN is a type of software networking where engineers/administrators can control networking traffic more cheaply without the use of hardware and/or expensive smart switches. It’s also known to manage traffic loads with more flexibility and control. SDN has been called the “CSCO killer,” which is the reason why tomorrow’s product launch is so critical.

Yesterday, in our Too Many Options Post, I noted that an options trader rolled into a very bullish position in the stock on a day that the stock massively outperformed the broad market an its peers:

selling to close 20,000 of the Jan 25 calls at .27 and buying to open 40k of the Jan 24 calls for .53 shortly after the open when the stock was $22.90.

It is my sense that there is a good bit of enthusiasm built into today’s event and now into next week’s Q1 results after a period of under-performance.  I want to take the portion of this position that I doubled down on back on Oct 24th and let the balance run as the upcoming events could cause a re-test of the important technical resistance level of $24, but the 50 day moving average of $23.38 could be a spot where the stock pauses prior to earnings.

Action: Sell to Close Half of CSCO ($23.25) Nov 16th 23 Calls at .82 for a .34 gain

On any further near term strength I may look to spread the remaining long calls, further reducing my risk into the earnings event.





Trade Update Oct 24th, 2013:  CSCO:  Beautiful Bounce Off Of Key Technical Support

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.

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

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!


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.


Original Post Oct 16th, 2013:  New Trade CSCO: Chamber’s Pot  

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