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  • Cisco Systems (CSCO) Strangle Trade Returns 675%

    12:20pm (EST)

    The bears took their best shot at breaking support this morning but the bulls have met the challenge and have held key levels on the major indexes.

    The Dow is currently down 91 points to 11,265 after trading to a low of 11,231.  We were looking to hold the 11,200 level and we would love to see a close above 11,250.

    The S&P is lower by 9 points to 1,209 and has touched a low of 1,204 while the Nasdaq is off by 33 points to 2,545.  Both indexes have also held support at 1,200 and 2,500, respectively.

    Today’s news is all about Cisco Systems (CSCO, $20.58, down $3.91) which is getting a 16% haircut after giving weak guidance.  We have followed the company since the early 1990’s and this is the biggest sell-off we have ever seen in the stock. 

    We were expecting a 5% move in shares either way after the company reported earnings but we didn’t think shares would move enough to play a straddle or strangle option trade.  Man, were we wrong.

    These types of option trades are ways to play a stock if you are uncertain which way shares are going to move after an earnings announcement.  However, you need a big move in the stock to make the trade profitable, usually 10% or more if you are playing both call and put options. 

    We started introducing these trades a few months ago because they can easily make you a triple-digit return or at least 10% if the stock moves enough.  Earnings announcements move stocks and we talk about this in our trading manual, How to Trade Options on Momentum Stocks.  We also show you how to use strangle and straddle option trades, how to figure out your breakeven points, and what your returns could be.

    The flavor of choice for Cisco would have been the November options because it is a one-day trade (usually) and there were a couple of ways we could have played this.  Cisco was near $25 going into yesterday’s closing bell…

    To do a strangle option trade, you could have purchased the Cisco November 23 puts (CSCO101120P00023000, $2.30, up $2.10) for about 20 cents yesterday, or 10 contracts would have cost you $200.  These options are worth $2,300 right now as they are up over 1,050%!

    The Cisco November 27 calls (CSCO101120C00027000, $0.01, down $0.08) could have been picked up for 10 cents yesterday which means it would have cost you $100 to buy 10 contracts.  The options will probably expire worthless.  No big deal.

    Your total investment would have been $300 and if you closed the puts right now you would have $2,300 in your account.  You would let the calls expire worthless because it is unlikely the stock will rebound and jump back to new highs by next Friday.  You total return would on this trade would have been 675%.  Not bad for less than 24 hours of work.

    Although we didn’t take this trade, we think there is another stock that could move 10% or more on Friday.  We take a look at it on our Watch List but we will probably stay on the sidelines as we already have enough action with our current trades.

    We like the fact the market has held support and has bounced off the lows of the day.  We still feel we can go higher and we are targeting the next move up in the market by Thanksgiving which means we may consolidate at these levels for a little bit.

    Despite today’s downdraft, our trades are holding up well.  Subscribers, check the Members Area for the important updates.  We are also selling another option today for our covered call position.

    Disclosure: No positions in CSCO
    Nov 11 3:04 PM | Link | Comment!
  • Cisco Systems (CSCO) on Deck

    12:30pm (EST)

    The market is struggling again today as the bears look to continue this week’s downdraft.  Futures were pointing towards a slightly higher open but the bulls couldn’t gain any traction despite a better-than-expected initial jobless claims number.  The Labor Department said claims dropped by 24,000 to 435,000 while the four-week average of claims fell 10,000 to 446,500.

    Although the market has bounced off its lows, the momentum doesn’t appear to be there today for the bulls.  After last week’s breakout past resistance, we knew there could be a slight pullback in the market which is only naturally and we are seeing that.  We will go over these levels in a moment but the one catalyst that could spring the market higher for the rest of the week is Cisco Systems (CSCO, $24.30, down $0.05) which will be reporting earnings after the bell today.


    The company is expected to post a profit of $0.40 a share on revenue of $10.7 billion.  Last time out, Cisco reported a profit of $0.43 a share on sales of $10.8 billion which was hit and miss.  Wall Street had expected them to earn $0.42 a share on $10.9 billion.  

    The company has a history of “beating by a penny” but their revenue is what is going to determine the direction of the stock (and the market) on Thursday.  There is a ton of analyst coverage on Cisco as 48 analysts follow the company.  Most of them favor the stock as 18 have a “Strong Buy” recommendation while another 17 have a “Buy” rating.  There are 9 “Hold” ratings and 3 “Underperform” with no “sell” recommendations.  Their average price target for the stock is $28.

    As we head to press, the Dow is down by 30 points to 11,316 but has traded to a low of 11,255 which the area of its previous 52-week high and should serve as support with 11,200 providing backup.

    The S&P 500 is lower by 2 points to 1,211 and has tested the 1,200 level by trading down to a low of 1,204.  There is further support in the 1,170-1,175 region but don’t think these levels will come into play.

    The Nasdaq has bucked the trend and is trading slightly higher as the index is up 3 points to 2,565.  Tech has traded to a low of 2,545 and there is strong support at 2,500 and then 2,450.  Cisco’s earnings will dictate if we get to 2,600 or test support on Thursday.

    As usual, we have a lot of action happening in the Members Area so let’s get on it.  We will be back in the morning at 9am with another full update.

    Disclosure: No Positions
    Nov 10 3:49 PM | Link | Comment!
  • Bulls Looking to Rebound

    9:00am (EST)

    The market appeared as if it wanted to go higher on Tuesday following a positive start but harsh criticism from China kept the bulls in check.  There is a lot of underlying stories concerning the Fed’s accommodative monetary policy, some good, most bad, and the end results won’t be known for years. 

    China is the world’s largest holder of U.S. debt and the market slipped after their country’s version of Moody’s (MCO, $27.81, down $0.26), Dagong Global Credit Rating, cut its credit rating on the U.S. to A+ from AA. 

    More specifically, Dagong said a “deteriorating debt repayment capability and drastic decline of the government’s intention of debt repayment” was the reason for the downgrade.  We can go with that but it’s hard to believe Moody’s is still in business and we can’t wait to short this name again down the road as it nears it 52-week high.

    The news impacted the dollar, which had been weaker, as it reversed its losses and started to gain strength throughout the day.  We have been mentioning this correlation between a rising market and a falling dollar and that theme is still in play.  At some point it won’t be but for now it is.  The dollar traded down to its 2010 lows last week but has bounced 3% since.

    As a result, the Dow fell 60 points, or 0.5%, and finished at 11,346.  We mentioned one blue-chip company yesterday, Bank of America (BAC, $12.27, down $0.33), which had been rallying, fell 2.6% yesterday and we said not to trust it until shares break $14.

    The S&P 500 gave back a 10 spot, or 0.8%, and settled at 1,213.  The index held the 1,200 level which will be crucial to help sustain the momentum from last week’s rally.

    The Nasdaq touched a new 52-week high of 2,592 but ended with a loss of 17 points, or 0.7%, to finish at 2,562.  We have been calling for a test of 2,600-2,700 for the index and that could come this week if Cisco Systems (CSCO, $24.35, down $0.04) impresses Wall Street.  The company will announce earnings after the close today.

    Although the bears got a victory yesterday, no real technical damage was done.

    Shares of Akamai Technologies (AKAM, $51.56. down $2.58) fell 5% on Tuesday after Netflix (NFLX, $170.46, up $1.33) went back to doing business with some of its former partners.  Apparently, Netflix hasn’t been too happy with Akamai’s web-content delivery for their subscription based movie-renting business model.

    Netflix is obsessive in making sure their customers have the BEST performing instant-streaming content and Akamai seems to be dropping the ball.  Netflix uses multiple content-delivery networks or, CDNs, to stream video and multimedia content on the Web and Limelight Networks (LLNW, $7.74, up $1.14) and Level 3 Communications (LVLT, $1.05, up $0.17) each surged 17% and 19%, respectively, after word spread that they were getting a bigger piece of Netflix’s pie.

    We have covered this story in the past and here were our thoughts nearly two years ago from an article we wrote concerning the 3 companies.  We have left the “old quotes” in to reflect the research (quotes from 2/8/09)…

    “Akamai provides the technology (content-delivery networks or CDNs) used to stream video and multimedia content on the Web. It is by far the Ace of Spades when it comes to the CDN market commanding nearly 70% of the market share. That number may have changed since my last update and is hotly debated but you get the picture.

    Akamai has been on both sides of the earnings surprise and had a string of beating earnings estimates up until last year. There’s a fine line between reporting “in-line” numbers and beating expectations and Akamai has been able to hold up well during the economic downturn.

    Although the stock can be volatile and is prone to large swings, Akamai’s biggest customers include Apple (AAPL, $99.72, up $3.26), FedEx (FDX, $55.27, up $2.69), Microsoft (MSFT, $19.66, up $0.62), Viacom (VIA, $18.12, up $0.87), and XM Satellite Radio (SIRI, $0.12, down $0.03). Content delivery is an area that is attracting a lot of attention and Akamai is certainly benefitting from Apple’s iPhone and Research in Motion’s smartphones.

    This means Akamai will help deliver high-bandwidth online content, like YouTube which you may have seen in Apple’s commercials for the iPhone. Akamai should continue to drive incremental revenues, not like in the past but online sales are still expected to grow 11% in 2009, and over time this will help the bottom line.

    As far as Akamai’s top competitors goes, there’s no need to mention it in conversation. Competition from the likes of Limelight Networks (LLNW, $3.33, up $0.16) and Level 3 Communications (LVLT, $0.99, up $0.07) hasn’t been serious enough to take away major market share.

    Think of Akamai dominating the market with its content delivery the way Apple dominates the market when it comes to music and the iPod. The real growth for Akamai will be online video where the market is just beginning. Most videos are still viewed on the TV but the trend is shifting.” (NYSE:END) 

    We wanted to show this article because we want you to be able to search our entire website for stories or companies that may be of interest.  Looking back at this article can provide some valuable research.  First, it’s hard to believe XM Satellite Radio is at $1.50 a share but the company seems to be making a comeback.  And second, Limelight Networks could be a stock (or option trade) worth watching going forward.

    The company become public in mid-2007 at an offering price in the low $20′s and has posted some lousy quarterly earnings over the past year.  However, last week, they reported Q3 revenue of nearly $50 million and profits of $300,000, or $0.01 a share, while Wall Street was looking for a penny loss on sales of $48 million.

    If Limelight can build off the Netflix momentum and start to add more customers, they could be a company to watch going forward.  As we head to press, Dow futures are up by 7 points to 10,320 while the S&P 500 futures are higher by 2 to 1,212.  The Nasdaq 100 futures are lower by 3 points to 2,173.

    Disclosure: No Positions
    Tags: NFLX, BAC, LLNW
    Nov 10 3:38 PM | Link | Comment!
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