Trade Update – $CIEN: Sold Call Calendar for Small Gain

by Enis June 5, 2014 10:24 am • Commentary

CIEN reported a very strong number this morning, beating on both revenues and earnings, and raising revenue guidance as well.  We were mildly bullish on the stock heading into the earnings event, but we certainly didn’t expect such an exceptional result on all fronts, especially after AT&T (CIEN’s largest customer, representing 21% of revenues) indicated a tepid environment in the second quarter.

As a result, our call calendar is a slight winner, but not as much of a gain as if the stock had been up 5-10% on the report.  Having said that, we identified $16 and $22 as the extreme technical spots on any big move in either direction after earnings.  So while our short volatility hunch did not work out, we’re content that our structure is still a slight winner even though one of our extreme scenarios came to pass.

We’ll take the trade off as the stock is trading above the $22 resistance level, and if it continues higher, our trade will go from a winner to a loser.


Action:  CIEN ($22.25) Sold to close the June/Oct 20 Call Calendar at $1.11 for a $0.11 gain


New Trade – $CIEN: Optical Illusion

I posted my thoughts on CIEN in today’s earnings preview.  The stock is one of the worst performers in the Nasdaq so far in 2014, down more than 20%.  Thursday morning’s earnings event is a key catalyst for the stock after the severe decline of the last 3 months.

This was my conclusion from the preview:

CIEN has had a mighty fall in the past 3 months, with the stock losing nearly a third of its value.  That has occurred without a major catalyst, though the overall profit backdrop for CIEN looks more challenging after its tepid guidance in the prior quarter and the relatively weak Q2 spending environment for telecoms (especially AT&T).

Yet, CIEN’s stock decline has priced in an awful lot of bad news, and the stock sits near the $18 support level, which is a big spot.  Risk/reward here seems to favor the bulls.  Since implied volatility is quite high, if we do do a bullish structure, it will likely be a structure that looks to take advantage of elevated front month premium.  We’ll be sure to update by tomorrow’s close if we pull the trigger.

With that in mind, I put on the following trade:

TRADE:  CIEN ($18.73) Bought June/Oct 20 Call Calendar for $0.99

-Sold to open 1 June 20 Call at 0.55

-Bought to open 1 Oct 20 call for 1.54

Break-Even on June Expiration:

-Profits are maximized at 20 on June expiration. 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.

-Max risk is 0.99

Rationale:  Given my view that the risk/reward is skewed to the upside rather than the downside, I put on an upside call calendar.  However, I don’t have a ton of conviction on the earnings event itself, so I bought October calls instead of near-dated July calls against the short June call position, which is a lower risk trade since the October calls will hold their value better if CIEN falls below $18 after earnings.