Cisco Systems, Inc. (CSCO) Traders Gamble On a Post-Earnings Plunge

Cisco Systems, Inc. will report fiscal first-quarter earnings after next Wednesday's close

by Karee Venema

Published on Nov 7, 2014 at 11:06 AM
Updated on Apr 20, 2015 at 5:32 PM

Option traders have grown increasingly bearish on Cisco Systems, Inc. (NASDAQ:CSCO), as the blue chip prepares to tell all in the earnings confessional after next Wednesday's close. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), for example, the stock's 10-day put/call volume ratio has jumped to 1.47 from 0.88 since the start of the month. What's more, the current ratio ranks just 1 percentage point from a 52-week peak, meaning puts have been bought to open over calls at a near-annual-high clip.

It's a trend that's continuing today, with puts crossing the tape at a rate seven times the intraday average, and outpacing calls by a nearly 8-to-1 margin. Short-term contracts are in high demand, too, as evidenced by CSCO's 30-day at-the-money implied volatility (IV), which is up 4.6% to 24.2%.

Drilling down, the stock's November and December 24 puts have garnered the most attention. A collective 29,919 contracts have changed hands here -- mostly at the ask price, hinting at buyer-driven activity. IV is higher at both strikes, and volume outstrips open interest at the back-month put, suggesting new positions are being initiated. This theory is echoed by Trade-Alert.

By purchasing the puts to open, the traders expect CSCO to surrender its perch atop $24 (the equity was last seen at $25.25) by the respective expiration dates. Delta on the front-month put is docked at negative 0.23, suggesting a less than 1-in-4 chance the option will be in the money at the close on Friday, Nov. 21 -- when the contracts expire. Delta on the back-month put -- which expires at the close on Friday, Dec. 19 -- is negative 0.25.

Looking at CSCO's historical post-earnings price action reveals these option bears may be lining up on the right side of the aisle. Over the past five quarters, specifically, the shares have averaged a loss of 3.5% in the session subsequent to reporting. For Cisco Systems, Inc.'s (NASDAQ:CSCO) fiscal first quarter, Wall Street is calling for a per-share profit of 53 cents.

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