EOT Trade Alert – August 11, 2008

Corey Williams | August 11, 2008

August 11, 2008

Trade Alert:

Buy CSCO January 2009 $27.50 Calls at $1.10 or better (CYQAY)

Company Background:

Cisco Systems (CSCO) is a technology company focused on networking and other communication products. The company’s hardware and software is used by all different types of consumers, from Fortune 500 companies to individuals. The company has more than 66,000 employees worldwide.

Short-Term Catalyst:

If you look at the technology market over the last few years you’ll notice an interesting trend. Towards the second half of the year the entire industry starts to rally. This is caused by the corporate budgeting cycles around the world. Everyone is under the “use it or lose it” mentality when it comes to technology deployment . . . and the cut off is the end of the year.

This year will be no different. The cycle will be starting in the next few months with corporate America placing orders for needed infrastructure, including networking equipment.

One of the biggest beneficiaries of this action will be Cisco Systems. The company makes networking and other communication infrastructure equipment and software. Some of their fastest growing markets are in other emerging countries like: Russia, Brazil, and China. With the US Dollar near all time lows, the country has a pricing advantage in these countries.

The company announced a strong final fiscal quarter and year end to 2008 (the fiscal year end is July 31, 2008). The company reaffirmed their long term revenue guidance and anticipated that revenue for the next two quarters would grow about 8%. Now, John Chambers, the CEO of Cisco is in my opinion an excellent leader for this technology company.

He could have become very aggressive on his guidance with the strong growth they’re seeing overseas. But, he kept his guidance conservative. This gives the company a good hurdle to get over. And the likelihood is they will outperform in the coming quarters.

On a technical basis, the stock is now trending higher. It gapped up on the recent earnings news, and I’m expecting the stock to retry its near-term high of just over $27.50. About 2 weeks ago the stock had a short term moving average crossover to the upside . . . giving us a good buy signal. Also, the stock is now trading above its 50 day moving average for the first time in more than a month.

Trade Details:

Option Ticker Symbol:	CYQAY
Underlying Stock Symbol:	CSCO
Current Bid-Ask Price:	$0.89 – $0.91
Option “Buy Up To” Price:	$1.10
Break-Even On Stock At Expiration:	$28.60
Maximum Risk Per Contract:	$110

Exit Strategy:

CSCO is trading at $24.46 a share. Support levels will be at $22.50 and again at $21. As the stock moves higher it will reach resistance around $27 and again around $28.75.

Chart: