Tuesday, August 9, 2011

Cisco - $17 ...no $16...no $15...no $16...no $15...no $14

CCI has decided it is time to exit its trade in Cicso. Several reasons
  1. The main reason for entering this trade was because Cisco represented a cheap, value play with a strong balance sheet and low valuation. That is still true today, but after the last few weeks there are now likely many, many stocks in value territory. It seems like it would be possible to find a value play that also has better growth prospects than Cisco.
  2. At the time of entering the trade there appeared to be several potential catalysts to turn around the fortunes of the company. This included the selling of some division, cost cutting via layoff and reorg, etc. Several of these things have happened, and even before the overall market collapse, they had not moved the needle on the stock. It is not clear what catalyst might move the stock in the near term.
  3. The initial investment thesis here also felt that more of Cisco's issues were process oriented than product oriented. However, recent results seem to indicate falling margins on some mainline product lines which could imply other competitive products are providing better value to the customer.

Given the above, CCI plans to exit the trade and believes there will be better places to invest the capital.

However........I did not want to sell into the teeth of a sell off and the volatility remains incredibly high so today I sold $15 Aug 12 calls for $.15 net of commission with the implied volatility at over 100%. Those are the weekly calls that expire in three days. (As an aside, the fact that weekly options even exist is kind of amazing...but I digress). Two outcomes if held until expiration this weekend.
  1. The stock rallies over $15 in three days (7%) - This really seems unlikely, but in this crazy market anything can happen. In this case, the stock is called away at around $15.15 and I'm OK with that for all the reasons mentioned above.
  2. The stock falls or stalls – The 1% premium over three days is kept as an offset for the loss and we look for another way to exit the trade next week.

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