It’s time to go long Arista Networks Inc (NYSE:ANET). But to improve your chances for a favorable trade, fading Cisco Systems, Inc. (NASDAQ:CSCO) as part of a pairs trade and using a couple limited-risk options spreads is smart business. Let me explain.
The Long of It All: Arista
In a world that favors growth over size, network communications outfit Arista Networks has a lot going for it. ANET stock is cranking out quarterly mid-to-high percent growth with its top and bottom-lines of 40% and 75% respectively.
Arista Networks also sports a market cap of around $20 billion. The smaller large-cap company is obviously no fly-by-night operation. And coupled with its monster growth, the potential for ANET stock to become an even larger and reward bullish investors with another strong rally in shares is compelling.
Looking at monthly chart of ANET stock since going public back in 2014, there’s no doubt shares have delivered handsome returns for investors.
But as a larger, but still small up-and-coming company with growth on its side, if history just rhymes the current five-month long consolidation should act as a solid platform for a breakout and another bull leg in ANET stock.
ANET Stock Options Strategy
Reviewing the options market for ANET stock, liquidity isn’t the best due to the share’s volatility and triple-digit price tag. That said, it should be adequate for establishing a vertical spread which reduces and limits risk in the event our bullish outlook is wrong.
The compromise with this sort of strategy on ANET is the trader initially caps the potential gain and profits are slower to come by than a straight long call purchase. Personally, the trade-off is still worth it in our view.
One spread which looks attractive is the Sep $320/$340 call spread for $3.50, or just over 1% of the risk associated with holding ANET stock.
With Arista shares at $279.22, this vertical does require shares begin to make good on our technical forecast. But with earnings in early August, a strong catalyst could easily initiate a base breakout on the price chart and send this spread easily in-the-money and generating a huge return on investment.
The Short of It All: Cisco
On the other side of the spectrum there’s Cisco. The mega-cap networking giant has been around the block and it shows. Not only is CSCO stock nearly ten times the size of ANET, but growth is also roughly one-tenth of what Arista Networks is knocking out these days.
Remember ANET’s stock chart shown above? Look to the far left of the CSCO chart from the dot.com era two decades ago. They look very similar during the run-up. And as stated above, if history can just rhyme, Arista still has room to vroom to the upside.
Looking once more at the CSCO stock chart, shares are sporting a similar-looking monthly base of four months in duration. However, shares are fighting the 62% resistance level. And even if Cisco does move higher, the modest growth compared to ANET points to a decent pairs or hedged position with CSCO stock on the bearish side of the strategy.
CSCO Stock Options Play
After looking at Cisco’s options and shares at $44.21, the Sep $42/$38/$34 put butterfly for 52 cents is favored. This moderately bearish position allows for an expiration profit range in-between $34.52 to $41.48. The max payout of $3.48 would be realized if CSCO stock landed at $38 on expiration. That’s unlikely due to the need for both time and price to play out perfectly.
Bottom line, as part of a pairs trade using the options market, CSCO and ANET are giving bears and bulls something to think about.
Investment accounts under Christopher Tyler’s management do not currently own positions in any securities mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.