The Dow Stock That Could Run Into Post-Earnings Trouble

Options traders appear bullish on CSCO ahead of earnings

Managing Editor
Nov 14, 2017 at 12:08 PM
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Dow component Cisco Systems, Inc. (NASDAQ:CSCO) will report fiscal first-quarter earnings after the close tomorrow. While fellow Dow stock Home Depot (HD) just reported an earnings beat, Cisco Systems must contend with its rather ugly earnings history. Below, we will examine Cisco Systems' earnings trends and how options traders are positioning themselves with the tech stock.

At last check, CSCO stock is up 0.1% to trade at $33.92. The Dow stock started the month off strong, touching a 16-year high of $34.75 on Nov. 1. Since then, however, the stock has pulled back to trade within one point of its 50-day moving average, a trendline it hasn't breached since early September.

Historically speaking, the stock's post-earnings reactions have tended to be lackluster, with CSCO closing lower the next day in five out of the last eight quarters -- including a 4% dip in August and a 7.2% drop in May. On average over this time frame, CSCO stock has posted a single-day swing of 4.7%, regardless of direction. This time around, the options market is pricing in a much higher 6.7% move for Thursday's trading, per at-the-money implied volatility data.

Analysts remain firmly upbeat toward the Dow stock. Of the 15 brokerages covering CSCO, 12 rate the shares a "buy" or "strong buy." Another subpar earnings result could prompt analysts to re-evaluate their bullish outlooks. 
 
In the options pits, call buying has dominated the picture, as evidenced by the equity's 10-day call/put volume ratio of 4.08 on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). This ratio ranks 2 percentage points from a 52-week high. In other words, options traders bought to open CSCO calls relative to puts at four times the clip during the past two weeks.
 
Digging deeper, call option interest is now in the 100th percentile of its annual range, indicating call traders are flocking to Cisco Systems ahead of earnings. The November 35 and 38 calls saw the largest increase in open interest during this time, with substantial buy-to-open activity seen at the former -- meaning traders are betting on the shares to rise above $35 in the weeks ahead.

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