Tuesday, May 5, 2009

CSCO Bull Put Spread

Cisco (CSCO) is reporting earnings after the bell and the stock has been grinding up higher lately with the market rally. The stock nearly hit 20 a few days ago and has great moving average support below here at the 18-18.50 level. Even though the stock has moved up nicely already I would much rather be bullish on it than bearish. I think the trade is to sell a put spread.

The implied volatility is a smidge higher than the HV but both are in the low to mid 40s so not too much of a discrepancy. I prefer to sell options into earnings unless I really think I know something. CSCO past earnings reactions have been relatively muted with the largest move of the past year being about 7%.

Sell the May 20/18 put spread for 80 cents or better.

Max gain on this trade is the initial credit you take in. If CSCO is above 20 next friday you keep the credit.

Max loss of 1.20 occurs below 18.

Breakeven on this trade at expiration occurs when the stock is at 19.20. So it can stay stable and you still win.

You could also just sell naked puts on CSCO in this situation using perhaps the June options if you are more bullish long term. I wanted to highlight the spread trade since it requires less margin and has less risk. But naked put sales are virtually the same thing as covered calls so if you don't mind owning the stock at a certain level then sell some puts naked by all means.

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