Long Term View of CSCO

Kent Shaw offers some stock option trading ideas on Cisco Systems (Ticker: CSCO )

CSCO has broken out of its double-bottom base on strong volume and is just now pulling back towards some major D-Level support. The chart below is a 2 year weekly chart.

Daily Perspective On Cisco

The daily chart below shows that CSCO is approaching the D-Level support (Confluence) created by the 382 retracement and 618 retracements drawn on the chart. The support level is $20.00-20.20 and is highlighted in yellow. Also note the Detrended Oscillator (DOSC) at the bottom of the chart that shows that CSCO is becoming oversold. On a weekly chart, volume has also declined somewhat (not shown) which indicates the up trend is still in tact. My proprietary volume program indicates that there are still some aggressive sellers out there so I'm not as excited about this opportunity as I would like to be but I think it serves as a good example. If I trade it, I will probably be less aggressive because of the volume issue. Several different ways to play this situation. I will list two.

Some Stock Option Trading Ideas

1) Aggressive Credit Spread - enter a JUNE 20/17.5 Short Put Vertical. Trading at around $0.50 right now. This offers a 12.5% monthly return (52 days til expiry) with a max loss of $200. Place a mental stop at below the Confluence (e.g. D-Level support) somewhere around $19.00-19.25. If volatility doesn't increase, this would produce a loss of around $45-50 per spread.

2) Conservative Credit Spread - wait for the $20 level, the low end of Confluence to be tested first. If it's tested and the stock rebounds from that level in a daily time frame enter the same credit spread outlined above after a positive closing price (close> open) or watch an intraday time frame (hourly) for a brief retracement and use D-Level analysis on that time frame to determine a safe entry point.

There are quite a few other ways that this setup could be played.

An OTM Butterfly could be initiated (20/22.5/25) which would be profitable if the stock rebounds back towards the 22.50 area. That trade would be at a debit and would generally be a lower probability trade than the credit outline above. The return on your capital would be much higher, however. At the moment, the debit is $0.70 for a June Fly and if the stock reaches $22 in two weeks the profit would be around $47 (assuming no change in volatility) so the return would be greater than 50%.

RISK NOTE: Keep in mind that CSCO is scheduled to release earnings on May 9th so the risk of a volatile move is high around that announcement. The largest loss I've ever experienced in options was because I entered a position a week before earnings so beware. Many of the folks on our forum don't trade options on stocks into earnings for this reason.

I'll try to keep an eye on CSCO and post other updates as this situation unfolds.

-Kent