Update – CSCO Stock Alt and Hedge

by CC May 23, 2017 2:05 pm • Trade Updates

Last week we previewed Cisco Q3 earnings. Here’s what we had to say:

So what we have here is a cheap stock, strong balance sheet, a company willing to make acquisitions to diversify from legacy technologies and frankly low expectations. But there is nothing sexy here, and I suspect the results will reinforce the recent consolidation

We detailed a couple of trade ideas, one a stock alternative, defining risk and targeting a move higher towards 36. And a hedge/bearish position targeting a move lower towards the 32 area. With CSCO more than two dollars lower the stock alternative is worthless. But it cost just .55 versus the more than $2 losses in the stock, so for those that put that on in lieu of stock it saved some money on this move and deltas or stock could be added on here for those that want to continue the bullish positioning. Leaving the trade on on top of that would act like leverage in case the stock saw some positive news in the next few weeks (unlikely as that is).

Next, let’s look at the hedge/bearish, because that has some management questions at this point. Here was the trade idea:


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.

With the stock 31.70 this trade idea is worth about 1.20, so about .80 versus the more than $2 move. Not bad but the move was a little more than expected, and therefore this trade has a couple of components to go over.

First and foremost, the stock is now below the target of the put fly. So it is no longer bearish. But since it’s worth 1.20 mark to market, but intrinsically worth 1.70. So there’s 50c of short premium yet to be realized if the stock went nowhere. That establishes some new useful breakevens. As long as the stock finishes between 31.20 and 32.70, this trade will be worth more than it is now, on June expiration. Anything below 31.20 or above 32.70 and the current profits are at risk.

That should inform management perspectives for both those that have it as a hedge and those that have it outright. Obviously, as a hedge the leash needs to be short if the stock declines from here and th trade should be closed and rolled lower to continue the hedge profile, because there’s no real protection below that lower breakeven. But of the stock bounces a little one can be quite patient with the ideal situation still being a close at or near 32.