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.