Cisco Or Crisco, Either Way It’s Slippery
if the rest of the Nasdaq gets pulled lower by Ciscoâ€™s
PowerRating) slide? This
morning we saw the effect the Lehman Brother downgrade had on CSCO and you have
to wonder whether the most likely stock to replace Honeywell
PowerRating) in the Dow 30
will be enough to send the Nasdaq to new lows.
The reasoning behind the
downgrade is certainly understandable, as CSCO derives 40% of its sales to
telecoms and weâ€™ve seen how miserably that sector has been performing. Given
the marketâ€™s focus on technology and the Nasdaqâ€™s heavy weighting in tech,
perhaps those investors with large exposure to CSCO, Juniper
PowerRating) and market
stalwart Sun Micro
PowerRating) should consider defensive positions in the QQQ
When the three-month
volatility for the QQQ (trading at $76 1/8, down 3 5/8) stands at 48 percent,
and the QQQ implied is 61 percent, you know there are plenty of folks out there
that are scared. Three weeks worth of at-the-money protection in the QQQ would
cost nearly 5% ($4 1/4), which is awfully expensive.
Thatâ€™s why traders
are looking at the December put spreads. The one-to-one put bear spread would afford
reasonable downside protection for the tech portion of their holdings. They’ll
be looking at buying the December 75 â€” 65 put spread for 3 1/4. Buying the Dec 75 put for 5
1/4 and selling the Dec 65 put for 2. The time decay is quite small, but if the
Nasdaq slipped another 15%, they’ll be damn happy they had some insurance.
Do you have a follow-up question about something in this column or other questions about trading stocks, futures, options or funds? Let our expert contributors provide answers in the TradingMarkets Question & Answer section! E-mail your question to firstname.lastname@example.org.
For the latest answers to subscriber questions, check out the Q&A section, linked at the bottom-right section of the TradingMarkets.com home page.