Looking at CSCO

CSCO has earnings coming up on 2/4/10. They have a history of running up into earnings and selling off after the release. I am looking at the APR $25/$23 risk reversal, buying 10 $25 calls and selling 10 $23 puts. I like the short $23 puts as this is a level of support on the daily chart. Based on past movements it could get to $26 before earnings.

Update with full analysis will come if I actually put on the position.

UPDATE:

So I ended up putting on a ratio trade. What I decided to do was Sell 5 July '10 $23 puts for $1.21 and buy 10 Feb '10 $25 calls. As I mentioned above I like the $23 puts as they offer a defined level of support on the daily chart:



Then in the next chart, I have plotted a 2 year weekly chart, as this is how far I needed to go back in order to find the next price target levels. I am looking for the first target of $25.5 and then $27 from there. I am banking on the hope that CSCO will act as it has historically trading up 2-3 points into their earnings release and then selling off.



I only plan to hold the Calls until the week of earnings. After which time I will re-evaluate my stance on the position and decide if I want to continue holding the Puts until expiration to possibly expire worthless, which currently have about a 70% chance according to the options market (not shown).

Below I have posted probability of CSCO touching certian prices by the day before earnings. I am obviously betting agianst the probabilities. I am making the bet that they are much higher and theirfore making this position more desirable. Take not of "Live" price slice of $24.16 or where CSCO is currently trading. If CSCO does nothing between now and the day before earnings my maximum risk based on the option pricing model is about $100. And you can take a look at where the P&L will be at various other prices that I have plotted.