*PSA: long premium directional options trades into events like earnings can be very Binary…. if you get the direction wrong initially, the probability of the option expiring worthless if very high… need to get a lot of things right to just break-even, direction, timing and magnitude of the move…
Yesterday I was at the Nasdaq again with Alex Mauer from Fidelity Investments for another edition of our series, In The Money. We discuss expectations into Cisco’s earnings after the close, the headwinds to its business, which last quarter, pre-coronavirus, their CEO called a “challenging environment”, the impact of a strengthening dollar and much more. I detail two options strategies for traders, and one for existing long holders. Watch here, and see my detailed notes below:
Cisco will report its fiscal Q2 earnings today after the close.
– Implied move in the options market about 5% or $2.40
– Avg move post-earnings last 4 quarters 6%, the last two though the stock has declined about 8% the day following results.
41% of sales come from outside North America… coronavirus, trade tariffs, and US Dollar strength (DXY) may weigh on earnings and outlook.
CSCO is a cheap stock trading 15x, but earnings expected to grow low single digits this year, with a low single-digit sales decrease. great balance sheet, management, and dividend yield, near 3%… but lots of headwinds…
-A miss and guide down and this stock is testing recent lows in mid $40s… $50 to $52 appears to healthy technical resistance.
Bearish Trade Idea: CSCO ($49.50) Buy Feb 49.50 – 46.50 put spread for $1
-Buy to open 1 Feb 49.50 put for 1.35
-Sell to open 1 Feb 46.50 put at 35 cents
Break-even on Feb expiration (a week from Friday):
Profits of up to 2 between 48.50 and 46.50 with max gain of 2 at 46.50 or lower
Losses of up to 1 between 48.50 and 49.50 with max loss of 1 at 49.50 or higher.
Rationale: this trade idea risks $1, or about 2% of the stock price but offers a profit potential of up to $2 or 4% if the stock is down 6% over the next 7 trading days.
Trade Idea #2: CSCO $49.50
Alternatively, if you think CSCO posts a beat and raise, I might look for a sustained catch-up rally and extend the time… look at March expiration and consider the March 50 calls, offered at a little less than $1.50, break-even at the August breakdown level… at $51.50
Trade Idea #3 CSCO ($49.50) Overwrite long stock:
Alternatively, IF YOU ARE LONG CSCO, are not going to sell prior to earnings, consider Overwriting (covered call) selling an out of the money call vs long stock…
For instance… vs 100 shares of CSCO at $49.50 sell to open 1 Feb 51.50 call at 50 cents…
if stock is 51.50 or lower on Feb expiration take in the 50 cents in the premium or 1% over the next two weeks… leaning on that $50 technical resistance level and the implied move… call-away is at 5%, in line with the implied move,
Options prices elevated into the print… 1yr chart of 30-day at the money implied volatility will come down after results…