Wednesday, August 17, 2016

CSCO Analysis

Update 8/18/2016: CSCO's earnings outperformed the Street's expectations. Traders, ever paradoxical, responded by bidding down the price. Of greater importance, implied volatility sank like a rock, and so did the short options premium. I exited with the premium at 51.6% of the position's maximum potential.

In other words, a textbook volatility play of the sort that warms a private trader's heart.

Shares declined by 0.7% over one day, or a -255% annual rate. The options position produced a 106.7% yield on debit for a +38,933% annual rate.

The networking equipment company Cisco Systems Inc. (CSCO), headquartered in San Jose, California, publishes earnings on Wednesday after the closing bell.

[CSCO in Wikipedia]


I shall use the SEP series of options, which trades for the last time 30 days hence, on Sept. 16.


Implied volatility stands at 25%, which is double the VIX, a measure of volatility of the S&P 500 index. CSCO’s volatility stands in the 30th percentile of its annual range. The price used for analysis was $30.66.

Ranges implied by options and earnings
WeekSD1 68.2%SD2 95%Earns
Implied volatility 1 and 2 standard deviations; central tendency earns move

Higher Probability Commodity Trading
by Carley Garner

The Trade

CSCO has ben meandering sideways since 2002 in a series of short legs that retrace nearly all of each prior move. The most recent leg to the upside began Feb. 8 and is near the upper level so the sideways range. If that range holds, a reversal from the present level remains likely.

Brokers in aggregate give CSCO a 36% enthusiasm index, with 64% of 22 analysts issuing strong-buy recommendations.

Three out of the last four earnings announcements have produced price increases the next trading day. There are no indications of an earnings surprise.

Positive brokers positive earning responses, a neutral chart with bearish expectations and no surprises expected. I'll go with a direction neutral trade.

Iron condor, short the $32 calls and long the $33 calls,
short the $28 puts and long the $27 puts,
sold for a credit and expiring Sept. 17.
Probability of expiring out-of-the-money

The premium is $0.31 which is 31% of the width of the position’s wings. The risk/reward ratio is 2.2:1.

The zone of profit in the proposed trade covers a $2 move either way. The biggest immediate move after each of the past four earnings announcements was $2.17, and the average was $1.36. After eliminating the maximum and minimum post-earnings movements, the central tendency is $1.24.

In order to get sufficient premium and there a sufficient risk/reward ratio, I've had to narrow both sides of the profit zone.

Decision for My Account

I've entered a position on CSCO as described above. The stock at the time of entry was priced at $30.73.

-- Tim Bovee, Portland, Oregon, Aug. 17, 2016


Tradecraft: Playing the odds to build winning stock market trades from options, a description of how I trade, can be read here.

Elliott wave analysis tracks patterns in price movements. StockCharts has a good explainer. The principal practioner of Elliott wave analysis is Robert Prechter at Elliott Wave International. His book, Elliott Wave Principle, is a must-read for people interested in this form of analysis, as is his most recent publication, Visual Guide to Elliott Wave Trading


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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 decisions for his or her own account, and take responsibility for the consequences.

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