Should You Short Cisco?

Shares of Cisco Systems CSCO are trading lower on the session by 0.95%, at $15.65. As you may remember from a previous post, “The Cisco Conundrum,” the stock has been in a major, major downtrend for the past year. It is one that is so clear, it is hard for even value investors to step up and buy shares. Over the past month, shares of Cisco Systems have managed to pick themselves off the floor and rally toward $16.00. The problem is shares are now sitting right at the $16.00 resistance level, as well as the downward-sloping 50-day moving average (a level at which Cisco Systems had plummeted month after month.) All technical signs point to another move lower. If you want to play this through options, there are several different ways you could go… • Sell upside to buy downside: This is known as a collar; it has similar risk characteristics to being short shares, though if done right you can get better risk reward by targeting certain strikes. An example of this would be selling the August $16.00 call to buy the August $15 put for a net credit of $ $0.12. • Buy pure downside: This could be done buy purchasing a put outright or by buying a put spread. This type of trade is single sided and leaves no upside risk. An example of this trade would be the purchase of the August $16/14 put spread for a net debit of $0.65. Note that this spread is already $0.32 in-the-money. • Use a short vol strategy: Given that the valuation is compelling in Cisco Systems around the $14.00 level, you could position yourself to play the downside in the near-term, while getting long shares at a much lower price by buying a put tree. In this strategy your are shorting two strikes for every one you buy, therefore you are net short volatility. An example of this would be buying the August $16/15/14 put tree for a net debit of $0.31. The trade profits from a move lower, below $15, while effectively getting you long shares at $14.00, where valuation is attractive. Cisco Systems, Inc. designs, manufactures, and sells Internet protocol (IP)-based networking and other products related to the communications and information technology industry and provide services associated with these products and their use. The company provides a line of products for transporting data, voice, and video within buildings.