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With just eight trading days to go until Cisco Systems, Inc.'s (NASDAQ:CSCO) fiscal third-quarter earnings release -- specifically, after the market close on May 15 -- today's bulls are zeroing in on the equity's May 22 call. So far, over 5,300 option contracts have been exchanged. Implied volatility is up, and 97% of the transactions have gone off at the ask price, pointing to buy-to-open activity.
The volume-weighted average price (VWAP) on these CSCO calls is $0.19. Accordingly, investors are hoping for a 6.2% bump from the stock's current price of $20.90, prior to the May 17 expiration date, in order to reach breakeven at $22.19 (strike price plus VWAP). Upside is unlimited from that point forward, whereas downside is capped at the debit paid at initiation.
Sentiment is mixed on Cisco Systems. Analysts are tilted in a bullish direction, with 21 sporting "buy" or better ratings, versus nine who offer "holds" or worse. They also maintain a consensus price target of $23.53 -- a 12.4% premium to the present price per share.
By contrast, in the options pits, the last 10 days have been particularly bearish toward CSCO. The International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) 10-day put/call volume ratio on the IT servicer is 0.72. That statistic places in the 88th percentile of readings taken over the past year, meaning that bettors are buying to open puts at an accelerated rate, relative to the annual average.
Such pessimism is understandable given Cisco Systems' lackluster performance on the charts. The company has added just over 6% year-to-date, and over the past two months, it has underperformed the S&P 500 Index (SPX) by over 8 percentage points. Moreover, specifically in relation to the May 22 call, CSCO hasn't traded above $22 since February 2011; plus, it failed to breach that level in March of this year, even after reaching a two-year intraday high of $21.98. In other words, there appears to be considerable resistance at that level.
So why the optimism among today's traders? It seems likely that investors are hoping for a post-earnings boost prior to expiration. After all, CSCO has beaten earnings estimates for eight straight quarters. Nevertheless, on average, it's picked up less than 3% in the days following its earnings releases -- which wouldn't be enough to get the 22-strike calls into the money from CSCO's present position.
In short, resistance at $22 and a less-than-inspiring earnings report could lead to an unwinding of optimism among the brokerage bunch. Resultant downgrades and/or price-target reductions would then create considerable selling pressure on the shares of Cisco Systems, Inc. (NASDAQ:CSCO), leaving today's call buyers in a lurch.