Cisco Systems (CSCO) will step up to release its fiscal fourth-quarter earnings report after the close of trading tomorrow, and Wall Street isn’t expecting anything groundbreaking from the networking giant. Currently, Wall Street is looking for Cisco earnings of 56 cents per share on revenue of $12.65 billion, with both figures up only slightly year-over-year.
Despite the low-expectations environment, there are still ways for CSCO options traders to book a profit on the event.
Historically, Cisco has a long history of beating Wall Street’s targets. In fact, Cisco has met or beat the consensus estimate in every quarter for the past four years. As such, it should come as no surprise that EarningsWhisper.com reports a fourth-quarter whisper number of 57 cents per share — a penny ahead of the consensus.
In addition to short-term optimism, the brokerage community has an overall bullish long-term outlook for CSCO. According to data from Thomson/First Call, 24 of the 40 analysts following CSCO stock rate the shares a “buy” or better. On the other hand, the 12-month price target of $32.50 currently represents a meager premium of only about $13% to yesterday’s close, leaving room for potential price-target increases on a good report.
Options activity, however, has grown decidedly bearish on CSCO’s short-term outlook. Currently, the August put/call open interest ratio comes in at 0.62, but the weekly Aug 14 series ratio has ballooned to a reading of 1.23. In other words, while options traders are looking for CSCO to continue higher in the intermediate term, they have concerns regarding the stock’s reaction to Wednesday’s earnings report.
Click to Enlarge Overall, weekly Aug 14 series implieds are pricing in a potential post-earnings move of about 4.7% for CSCO. This places the upper bound at $29.83, while the lower bound lies at $27.17.
Technically, chart congestion is thick above CSCO between the $28.50 and $29 regions — meaning it may take a considerably good report or guidance to push the stock past this area.
On the downside, immediate support lies at $28, while the next layer of firm support arrives at $27.75 with CSCO’s 200-day moving average.
2 Trades for CSCO Stock
Call Spread: With the bar set moderately low for Cisco earnings, and the company’s growth chugging along solidly, there should be little in the way of downside surprises for the stock. Given chart congestion, however, traders looking to follow the brokerage community’s bullish lead might want to consider a weekly Aug 14 series $28.50/$29 bull call spread.
At last check, this spread was offered at 20 cents, or $20 per pair of contracts. Breakeven lies at $28.70, while a maximum profit of 30 cents, or $30 per pair of contracts, is possible if CSCO closes at or above $29 when August options expire at the end of this week.
Put Sell: For those not expecting CSCO to make much headway in either direction, a weekly Aug 14 series $27 put sell may be what you are looking for. At last check, the weekly Aug $27 put was bid at 23 cents, or $23 per contract.
On the upside, you keep the premium received as long as CSCO stock closes above $27 when August options expire at the end of this week. On the downside, should CSCO trade below the sold strike ahead of expiration, you could be assigned 100 shares for each sold put at a cost of $27 per share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
