Betting against CIEN has been a profitable game. My records show that seven as of 12 breakouts to the downside have been profitable since January 2009, with returns average 9.7% per trade. The return adjusted for the frequency of profitable breakouts is 6.8%.
Despite the company's miserable financial record, CIEN has been on what could be construed as an uptrend since October 2011, at least if you down a shot of whiskey and then squint real hard. The price has traced out a series of higher lows and higher highs in that period, although the rise of the extremes has been shallow enough to make the whole structure look suspiciously like a sideways correction.
More recently, CIEN executed a rise from $11.96 on Oct. 23, 2012 up to $16.72 on Jan. 3. From the peak, it fell for six trading days, and on Friday it broke below its low of the past 20 days: $14.76.
It would take a rise above $16.72 to reestablish the uptrend, and yet the correction has been quite shallow so far.
CIEN is one of 23 highly liquid stocks that broke beyond their price channels on Friday. Thirteen broke out to the upside and 11 to the downside, with success rates in the direction of breakout running from 87% down to 20%.
Headquartered in Linthicum, Maryland, Ciena provides optical networking equipment, a key component of the infrastructure of high-speed communications.
Amazingly, given Ciena's financials, analysts overall are net positive on the company, collectively producing an 11% enthusiasm score. However, that score is down from the 37% of three months earlier.
With negative equity and negative net income, there's really no way to do a meaningful calculation of return on equity -- there's no equity on which to generate a return! Same with the debt to equity ratio.
I'll just note than the company at last report has negative 89 cents per share in equity, net income of negative $1.44 per share and liabilities totaling $6.84 per share.
Institutions own nearly all of CIEN's shares, and the price is not abysmally low. It takes 80 cents in shares to control a dollar in sales.
Analysts are forward looking in their assessments, so I can only assume that they expect Cienna to turn around in some fashion. Although the last two quarters showed losses, the company was profitable during one quarter in 2012 and two in 2011. It has surprised to the upside five times in the last q2 quarters, and to the downside seven times.
So if the stars are aligned, the company has proven that it can make money. But all of this is, frankly, irrelevant to my trading. I trade charts. CIEN has broken out to the downside on the daily chart, the odds of a profitable trade in that direction are quite good, so at this point under my rules it appears to be a trade worth taking.
CIEN on average trades 3.8 million shares per day, sufficient to provide a moderate selection of option strike prices with open interest running to the three- and four-figures in the front month. The front-month at-the-money bid/ask spread for puts is 4.4%.
Implied volatility stands at 48%, in the bottom half of the six-month range. It has been moving sideways at about that level since the start of the year.
Options are pricing in confidence that 68.2% of trades will fall between $12.62 and $16.68 over the next month, for a potential gain or loss of 14%, and between $13.67 and $15.63 over the next week.
Call options are trading at more than double their five-day average volume, and puts are in the cellar at 29% of average volume.
The fair-price zone on today's 30-minute cdhart runs from $14.58 to $14.72, encompasssing 68.2% of transactions surrounding the most-traded price, $14.67, where the stock is trading four hours before the close. The stock has remained within the zone for most of the day so far.
Ciena next publishes earnings on March 4.
Decision for my account: I took the trade based on the historical odds of a successful bear trade in the context of some truly awful financials.
I structured the trade as a bear call options spread expiring in February, short the $15 call and long the $17 call. This structure makes the position profitable up to $15.47, for a 5.2% cushion. The maximum potential return at expiration is 31%.
If I had to the position as it continues to fall, I'll buy puts expiring in April with deltas as close to 70 as I can manage.
My trading rules can be read here. (They don't talk about the trend score because I'm still developing the tool.) A discussion of recent modifications to my trading methods, which haven't yet been incorporated in the original write-up, can be found here.
And the classic Turtle Trading rules on which my rules are based can be read here.
Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.