This week I’m adding a recent earnings winner, American telecommunications networking equipment and software services supplier Ciena (CIEN).
Market Overview
Before we dive into this week’s idea, it’s time to move on from our ZoomInfo (ZI) and Camping World Holdings (CWH) covered call trades. Over the last two weeks as growth stocks, and most stocks in general, have come under intense pressure, ZI and CWH have bounced above and below our stop. With just a couple days to go until expiration, and the stocks again marginally below our stop, let’s close our positions.
To execute the ZI trade, you need to:
Sell ZI Stock
Buy to Close the ZI December 75 Call
This will leave us without a stock or option position in ZI.
To execute the CWH trade, you need to:
Sell CWH Stock
Buy to Close the CWH December 45 Call
This will leave us without a stock or option position in CWH.
Moving on …
Investors came into last week a bit on edge due to the new COVID-19 variant, and ahead of an important read on inflation. However, by the end of the week both scares were digested and investors once again were able to climb the wall of worry.
After two straight weeks of selling, the bulls managed to wrestle the momentum away from the bears as the Dow advanced 4.0%, the S&P 500 surged 3.8% and the tech-heavy Nasdaq gained 3.6%.
However, much like the past several months, the positive vibes from last week were once again vanquished as Monday the market again came under pressure. Blink, and the narrative will have changed yet again.
This week I’m adding a recent earnings winner, American telecommunications networking equipment and software services supplier Ciena (CIEN).
New Recommendation
The Stock – Ciena (CIEN)
Why the Strength
One theme we’re starting to pick up on is a “new” networking boom, with the upgrading of mobile networks to handle 5G traffic and the movement toward edge computing (putting content closer to the end user instead of only in data centers) resulting in big demand.
Ciena’s gear plays into both trends, leading to a big pickup in growth (and a big breakout for the stock). In the most recent quarter, Ciena reported consensus-beating revenue that exceeded $1 billion for the first time—up 26% from a year ago—while earnings of 85 cents per share were 42% higher (in line with expectations), with both figures marking big accelerations from recent quarters. But the best is yet to come: Ciena’s Q4 orders were significantly higher than revenue for the third consecutive quarter, which management said pointed to “substantial momentum” and provided increased confidence in the demand environment.
Indeed, the firm ended the fiscal year (in October) with its highest ever backlog of nearly $2.2 billion, double the year-ago figure! The company added 34 new customers for its premium WaveLogic 5 Extreme network solution and secured a dozen new wins, including significant multiyear deals with two of the largest U.S. Tier 1 service providers.
Additionally, Ciena closed a deal with AT&T to acquire its Vyatta virtual routing and switching technology, which will increase its 5G exposure; it also announced a partnership with Samsung to support that firm’s global 5G networks.
Moving forward, Ciena sees its addressable market in the edge space soaring 70% in the coming years (from $13 billion) and has authorized a $1 billion share repurchase program. Analysts see relatively tame growth going ahead, but big investors don’t buy it.
Technical Analysis
CIEN had a so-so post-crash rally that petered out near 61 in August of 2020. It collapsed from there, but after bouncing it spent many months hovering in the 50 to 60 range, and then it began to change character in October—CIEN tightened up for a few weeks, popped to 60, then tightened up for another month, all of which told you the sellers had left the building. And last week’s huge breakout is obviously a good sign. We’re OK buying a little here or on dips. Stop—64
The Covered Call Trade
Buy Ciena (CIEN) Stock at 75, Sell to Open January 75 Strike Calls (exp. 1/21) for $2.20 or a Net Price of 72.80 or less
Static Return: $220 per covered call (3.02%)
Breakeven: 72.80
Covered Call Return (if assigned): $220 per covered call (3.02%)
Please note, the stock and options prices will be moving throughout the day, so these prices are simply an approximation of prices that you should be able to achieve.
However, the important component of this equation is that the stock price paid, minus the premium received via the call sale, equals the Net Price, or 72.80 or less. (In this case 75 minus 2.20 = 72.80. Or another example is you could pay 76 for the stock and sell the call for 3.20, which also equals 72.80.)
For every 100 shares of stock you buy, you can sell 1 call. For every 200 shares of stock you buy, you can sell 2 calls. And so on …
Open Positions
If our stop is hit, I will send an alert giving detailed instructions on how to exit the trade. But don’t get too worried about setting the stop. I will manage that for you.
| Stock Name and Symbol | Price Bought | Current Stock Price | Stop | Option – Price of Call Sold | Current Option Price |
| Marvell Technology (MRVL) | 69.50 | 86.50 | 60.0 | December 70 — $3.40 | $16.50 |
| Zoom Info (ZI) | 74.00 | 61.00 | 63.0 | December 75 — $4.00 | $0.05 |
| Goodyear Tire (GT) | 22.93 | 21.00 | 19.5 | December 23 — $1.17 | $0.30 |
| Camping World Holdings (CWH) | 44.00 | 39.00 | 39.5 | December 45 — $1.40 | $0.05 |
| Pure Storage (PSTG) | 33.15 | 31.50 | 26.5 | January 33 — $2.25 | $1.00 |
The next Cabot Profit Booster issue will be published on December 21, 2021.
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