Earlier we previewed Cisco’s (CSCO) earnings, due after the bell. I wanted to go over a couple of option strategies dependent on intent or whether already long the stock. First, let’s check back in on the implied move as that can help inform our strike selection. The options market is implying a 1.25 move in either direction for this week (capturing the event). Looking farther out, the options are targeting a move of about 1.65 for June expiration. For those looking to target the stock for a breakout that means 36 is a good target out until June, and since the stock is unlikely to to do that move all in one fell swoop, an in the money call fly makes sense to target that move higher:
Bullish/ Stock Alternative
CSCO (34.15) Buy the June 34/36/38 call fly for .55
- Buy 1 June 34 call for .92
- Sell 2 June 36 call at .20 (.40 total)
- Buy 1 June 38 call at .03
Breakeven on June expiration: Gains above 34.55 and below 37.45 of up to 1.45
Losses of up to .55 below 34.55 and above 37.45
Rationale – This trade targets a move higher in the stock, pinpointing 36 as a price target. The most that can be lost is .55, well less than the implied move on the event. The price target is slightly above the implied move for both the event itself as well as its expiration in June, giving the stock room to go higher on a breakout. The worst case scenario is the stock is substantially lower and the entire .55 is lost, but that’s unlikely on the event itself as the trade is looking out to June and will retain some value even if the stock is lower.
Bearish / Hedge
For those looking down, and looking to hedge some existing shares, the put fly in the other direction makes sense:
CSCO (34.15) Buy the June 34/32/30 put fly for .40
- Buy 1 June 34 puts for .74
- Sell 2 June 32 puts at .21 (.42 total)
- Buy 1 June 30 call at .08
Breakeven on June expiration: Gains below 33.60 and above 30.40 of up to 1.60
Losses of up to .40 above 33.60 and below 30.40
Rationale – This trade targets a move lower in the stock, pinpointing 34 as a price target. The most that can be lost is .40. If it’s used as a hedge it doesn’t have unlimited protection as profits on the fly itself trail off below the mid point. But since it’s targeting a move below the implied that should suffice in most cases. The ideal situation is for the stock to be higher by more than the hedge costs. For those looking to do this trade outright the trade would lose lots of value on a big move higher, but unlikely to lose all value.