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Time to Ring the Cash Register on Big Technology

Jan. 31, 2011 3:29 PM ET
Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

Given the worsening technical picture for the market in general, and technology stocks specifically, I am selling my Cisco Systems (CSCO) March, 2011 $20-$22 call spread at the market. With the stock here at $20.82, I see a middle market for the spread at 98 cents, so I’m using that as my notional exit price. Those “Macro Millionaires” who came in with me on December 16 when the stock was at a lowly $19.65 are up 66% on the call spread position. Those who shorted the puts with me and covered down 71% three weeks later have made even more money.

Analyze this trade and you’ll see what this game is all about. In little more than a month, Cisco Systems stock rose by 5.9%. By risking only 5% of your capital you were able to add 3.31% to the value of your total portfolio.

You found a stock with great fundamentals. You zeroed in on the move with the highest probability of taking place, the next $1 move up, and then leveraged up with a limited risk position that offered much more upside than downside.

This is how you made money on this trade, and will continue to do so on the next one, and the one after that. You could be making your stock picks with a coin toss, and still make money with this strategy. This is how I do it. This is how George Soros and Paul Tudor Jones do it. This is how Morgan Stanley and Goldman Sachs do it. I know because I have been trading with, arguing with, and drinking with these guys for 30 years.

This is not a home run, but is at least a double, and possibly even a triple. Given that in this zero return world, many hedge funds would be happy with an annual 11% return, and would kill for 20%, 3.31% on a single trade is nothing to sneeze at.

I’ll probably re enter this trade at a later date with a different set of strikes. On to the next one.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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