The stock had run up 12% in less than 2 weeks before recently encountering resistance at the Chaikin Trend line and is now in overbought territory. While the Tech sector is strong, we note the predominant "sea of red" for this stock on the Chaikin Money flow indicator and an anemic relative strength indicator.
While the preponderance of technical evidence is bearish, analysts have been increasingly bullish on the stock, raising their estimates. Plus, valuations are not excessive and the cost of the stock in terms of future earnings is attractive (Bullish Price to Sales Ratio = Bullish).
The options market is anticipating a move of around 9% when earnings are announced on this $20 stock. Today, Cien made a large downward price move and I took advantage of the spike in implied volatility by selling the 22 call strike for $.83. That means that CIEN can appreciate to $22.83 between now and expiration, and I'd break even on the trade. However, my plan is to capture around half the credit and buy back the options once earnings come out. If all goes well, I'll profit mostly from the collapse in implied volatility. If price goes my way away from my short strike, that will be gravy.
For those without the stomach and risk tolerance for holding naked option positions, a risk defined call vertical can be sold for an attractive risk to reward ratio. It's a little closer to the money, but it pays better than the risk. Here's the trade.
SELL -1 VERTICAL CIEN 100 SEP 14 21/22 CALL @.29 LMT
- Probability of breakeven or better by expiration: 65%
- Return on risk = 40%
- Theoretical trade risk = 35%
- Breakeven: CIEN's price can appreciate to $21.29 by September expiration.