Tuesday, August 09, 2005


My suspician is that CSCO's earnings after the bell today won't move the stock much. I was trying to think of an option position to enter in advance of earnings today that might profit. I decided that I'm too inexperienced with this type of trade to make a good judgement on what type to make, so I decided to write some ideas down instead and then check to see what happens tomorrow.

The obvious strategy I guess would be to short a straddle. The front-month 20.0 straddle is 1.10 bid x 1.20 offered. This would have a maximum profit of 1.20, with break-evens at 21.10, and 18.90. The idea selling a straddle ahead of earnings makes me nervous. I think the earnings won't be a big deal, but hey I'm very likely wrong....I'd hate to pay a serious penalty if I was wrong....

The next idea I thought of was to buy a butterfly. The 17.50-20.00-22.50 call butterfly is 1.35 bid x 1.60 offered. If I am calculating correctly, that would be a potential max profit of 3.45, with break evens at 19.10 and 20.90.

I was also thinking about time-spreads. Time-spreads are always confusing to me. Sell the aug 20.00 call at .35 and buy the sept at .60? The front month has a volatility of 40.2% or so while the sept has a volatility of 29.0%. This seems like it would be favorable since I'd be selling a high-volatility option and buying a low volatility option. The thing is IV is I think volatility will decrease after earnings. Time-spreads generally are hurt by implied volatility drops.


At 8:47 PM, Blogger Alien Shaman said...

Since you are just dealing in options - I guess it doesn't matter what stock you work with - but as for going long - I would stay away from Cisco. As someone in IT, Cisco has a lion share of the market - but they are like the Titanic, hard to steer, and destined to sink because they don't have the vision to excel like they once had.


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