Ciena Corporation (NYSE:CIEN) has had a great 2018; however, October may be the time to take money off the table with preemptive moves in CIEN stock. Specifically, there are two mildly bearish plays in CIEN that I want to share with you, as each play could lead to impressive profits.
The network strategy company, which sells businesses hardware, software and related services has delivered fantastic results for its investors. Year-to-date (YTD) Ciena stock is up 43%. The strength mainly comes from analysts and investors that regard the company as a major infrastructure play, both in the U.S. and internationally. As data usage increases, CIEN stock is expected to be a beneficiary in the long-term.
Ciena has also been successful in re-investing its profits in innovation and customer service.
CIEN is expected to report earnings on Dec.6. I expect some profit taking in Ciena, especially in October. Cien’s largest two customers are Verizon (NYSE:VZ) and AT&T (NYSE:T), Tier 1 telecoms companies, each accounting for about 10% of Ciena’s sales. Ciena also faces intense competition from robust companies that include Cisco (NASDAQ: CSCO) and Corning (NYSE:GLW). Therefore any weakness reported in the earnings calls of either the customers or the competitors could also affect the Ciena stock price negatively.
Those investors who pay attention to shorter-term moving averages should note that they are giving a “sell,” while the oscillators are giving “overbought” readings. CIEN stock’s 52-week price range has been $19.40 (Nov. 15, 2017) — $ 32.33 (Aug 31, 2018).
Short-term support for Ciena is ﬁrst at $29 and then at $27.4; meanwhile, short-term resistance in CIEN stock is ﬁrst at $30.6 and then at $32. If you also believe that there might be some moderate short-term profit-taking in Ciena stock before its earnings call, here are the two trades set up for the stock (prices are based on CIEN stock’s closing price of $29.93 on Oct. 4):
Two Moderately Bearish Strategies on Ciena Stock
1. If you already own Ciena stock, consider using an in-the-money (ITM) covered call to protect some of your profits in the stock. For every 100 shares of CIEN stock you own, sell a CIEN Jan 2019 $27 call option, which currently trades at $4.15. The $27 option is slightly in-the-money (ITM), offering more downside protection in case of volatility and a decline in CIEN stock around the earnings call season.
This call option would stop trading on Jan. 18, 2019 and expire on Jan. 19.
Assuming you would enter this covered call trade at the closing prices on Thursday, Oct. 4, at expiry the maximum return would be $122 (i.e., ($4.15 – ($29.93-$27))*100), excluding trading commissions and costs.
An ITM Covered Call’s maximum profit is equal to the extrinsic value of the short call option. The trader realizes this gain as long as the price of Ciena stock at expiry remains above the strike price of the call option (i.e., $27).
At expiry, this trade would break even at a CIEN stock price of $25.78 (i.e., $27-$1.22), excluding trading commissions and costs.
2. Consider a bear put spread whereby you would purchase a CIEN put option at a specific strike price, while also selling the same number of puts with the same expiration date at a lower strike price. Traders could use this strategy when they expect moderate downside in CIEN stock within a given period.
Therefore, as the first leg of the bear put spread, I would consider buying a CIEN Jan 2019 $30 put option, which currently trades at 1.97. At the same time, for the second leg of the bear put spread, sell a CIEN Jan 2019 $27 put option, which currently trades at 88 cents.
These put options would stop trading on Jan. 18, 2019 and expire on Jan. 19.
Your maximum risk would be $109 (i.e., $1.97 – $0.88) * 100) at a price of $30 at expiry (excluding trading commissions and costs). If Ciena stock were to close above the strike price of the long put (i.e., 30), you would lose the entire amount invested in the spread, i.e., $109 (plus trading commissions and costs). In other words, the maximum risk is the net premium paid at the initiation of the spread.
Your maximum return would be $191 at a CIEN stock price of $27 at expiry (excluding trading commissions and costs). In a bear put spread, your maximum profit would be equal to the difference between the two strike prices (i.e., 30-27), minus the net cost of the options (i.e., $1.09) times 100.
At expiry, this trade would breakeven at a Ciena stock price of $28.91 (i.e., $27 + 1.91).
The Bottom Line on CIEN Stock
I believe moderate profit taking in Ciena stock is coming. However, as prudent investors, it is always crucial to maintain a clear risk/return profile. Thus, if the drop does not happen, a test of the previous highs and further, up toward the mid-$30’s level, could be the next leg up.
As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.
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