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

Overbought Cisco ripe for a small correction

Global Head of Listed & OTC Derivatives Sales / Saxo Bank
Instrument: CIS:xetr
Price target:
Market price:

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
Cat Cat
Patrice - CSCO reports tonight. What is your exit strategy if price moves to the upside?
hikarihikki hikarihikki
I think Maximum loss is $0.64 or $384 for 6 Put Spreads as indicated


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