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Ahead of Cisco earnings, trader is betting on 8% rally before weekend

Trader sees Cisco bouncing on earnings

Cisco is gearing up to report earnings Wednesday, and founder Todd Gordon says the charts are pointing to a major rally for the stock.

"Tech shares have pulled back into support, and one name that I see at support heading into earnings tomorrow is Cisco," he said Tuesday on CNBC's "Trading Nation."

In the last few trading sessions, shares of Cisco managed to pull back to the $51 region, which Gordon said was the area where Cisco formed a "double bottom" pattern around May and June. With Cisco near that region again, Gordon pointed out that there are "buyers down at the $51 mark."

What's more, Gordon said that the moving average convergence/divergence (MACD), which is an indicator that measures the momentum of a stock, shows that Cisco is oversold and therefore due for a bounce.

Gordon believes that Cisco could bounce back up to $55 on earnings. But given the rising implied volatility, or the price of options, heading into earnings, he wants to sell a put spread as options are expensive going into the event.

Therefore, Gordon wants to sell the August monthly 55-strike put and buy the August monthly 50-strike put, which would give him a net credit of about $2.14. This means that $214 is the maximum reward that he can receive should Cisco close above $55 on Aug. 16 expiration. A rally to $55 implies 8% upside. 

Should Cisco close below $50, then Gordon could lose $285. However, Gordon said that's only likely to occur if Cisco has an "absolute earnings disaster."

On Tuesday, Cisco was up 2% to around $52.74. The stock has gained 22% year to date.

— Todd Gordon owns Cisco.