Last week we previewed Cisco’s (CSCO) FQ1 earnings event and detailed a couple of trade ideas, one defined risk bullish and the other a low dollar cost hedge. The stock was at a potential inflection point, bumping up against long term resistance from the mid aughts. The stock did indeed breakout and with a couple dollars higher it’s a good time to check in for trade management purposes.
The hedge is essentially worthless, costing .45 versus the 2.50 move higher in the stock. So it did its job for the event but it’s really offering any protection into the end of the year. Those looking to replace that hedge should probably look farther out now into 2018 and perhaps do a zero cost put spread collar. There’s probably no rush at the moment but perhaps this strategy makes sense to put on closer to the end of the year to protect gains into the New Year.
Now let’s look at the bullish/stock alt:
Bullish/ Stock Alternative
CSCO (34.18) Buy the Dec 34/38 call spread for .93
- Buy 1 Dec 34 call for 1.02
- Sell 1 Dec 38 call at .09
With the stock now 36.73 this call spread is worth about 2.70 versus the initial .93 at risk. It’s nearly 100 deltas at this point, meaning any move higher or lower and it will essentially just mimic gains and losses in the stock. For those happy with the profits from the event it can simply be closed. For those wanting to take most of the profits but leave something on the table into 2018 a roll of the 34 calls up and out can book profits and allow for further profits. The Feb 38 calls are about .78 and closing the Dec 34 calls at 2.73 means booking a little more than a dollar in current profits and then being left with a Dec/Feb 38 call calendar for a credit. That’s probably the best way to book profits and roll, leaving a mildly bullish low cost chip on the table. Other more aggressive rolls would mean moving down a strike or two on the Feb call buy. For instance the Feb 36 call is about 1.70 and a roll to that wouldn’t book much of the current profits but would leave a free Dec/Feb 36/38 vertical calendar, with $2 in profits if the stock closes at or above 38 on Dec expiration, then the possibility for even more profits for the first few months of 2018.
There are no bad decisions here, it just depends on an overall view for the next few months. The stock is in no man’s land now that it’s broken out so if the market continues higher into year end CSCO is likely to play catch up. On the flipside the resistance that it just got above will serve as support if the stock were to give up some of the gains.
