Medium term
Trade view / 11 August 2016 at 13:52 GMT

Overbought Cisco ripe for a small correction

Head of Futures & Listed Options / Saxo Bank

After a nice ride from 27.13 on June 27 to a high of 31.25 on August 9 Cisco is now overbought and ripe for a small correction. Stochastics, RSI and MACD are giving us a selling signal.

Let’s buy the Sep16 (expiry September 16) 31/29 put spread to play a retracement to 29.68 (38.2% of retracement of 27.13/31.25).

CISCO Daily Bar Chart
 Source: Saxo Bank

Management and risk description

For a $20,000 trading account, we would invest no more than 2% of the account value or $400 on that trade in order to respect some strict money management rule.

Entry:  buy CSCO Spe16 31/29 Put Spread at $0.64.

=>   buy CSCO Sep16 31 Put at $0.88

&   sell CSCO Sep16 29 Put at $0.24

Maximum Profit at expiry is limited

Maximum profit at expiry achieved when underlying price =< short strike price
At expiry maximum profit = Long strike price minus short strike price minus premium paid
                                         = 31 – 29 – 0.64
                                         = 1.36
One put spread worth $0.64 X 100 shares = $64
As we can invest no more than $400 on that trade (2% of the account value) we will buy:
$400/$64 = 6.25 or 6 put spreads
For 6 CSCO Sep16 31/29 put spreads we invest $384 ($0.64 X 100 shares x 6

put spreads) to realise a profit of $816 ($1.36 X 100 shares X 6 put spreads) if the market closes at or below 29 at expiry.

Return on Investment if the market closes at or below 29 at expiry

= Profit/Premium X 100
= $1.36/$0.64 X 100
= 212.50%

Maximum loss

Maximum loss is limited to premium paid
Maximum loss is $0.64 or $384 for 6 Put Spreads.

Breakeven point at expiry

Long Strike – Premium Paid
$31 - $0.64 = $30.36

Target: 29 or below

Time horizon: 36 days

5-Year Bar Chart
CISCO 5 Years Bar Chart
 Source: Saxo Bank

— Edited by Martin O'Rourke

Non-independent investment research disclaimer applies. Read more
17 August
Cat Cat
Patrice - CSCO reports tonight. What is your exit strategy if price moves to the upside?
18 August
hikarihikki hikarihikki
I think Maximum loss is $0.64 or $384 for 6 Put Spreads as indicated


The Saxo Bank Group entities each provide execution-only service and access to permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on or as a result of the use of the Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. When trading through your contracting Saxo Bank Group entity will be the counterparty to any trading entered into by you. does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of ourtrading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws. Please read our disclaimers:
- Notification on Non-Independent Invetment Research
- Full disclaimer

Check your inbox for a mail from us to fully activate your profile. No mail? Have us re-send your verification mail