A Trio of Strategies for Tech Sector Earnings

by Joseph Hargett | May 9, 2012 9:06 am

Despite the recent turmoil on Wall Street, opportunities still exist for those with the patience to seek them out. For instance, traders with a penchant for the technology sector will want to keep a close eye on this week’s earnings reports, as a broad swath of the technology sector is scheduled to release their quarterly reports this week.

Tucked away amid this latest wave of corporate earnings announcements are reports from networking giant Cisco Systems (NASDAQ:CSCO[1]), software firm CA Inc. (NYSE:CA[2]) and semiconductor specialist NVIDIA (NASDAQ:NVDA[3]).

Cisco Systems

After the close of trading this afternoon, Cisco is expected to post a third-quarter profit of 47 cents per share on revenue of $11.6 billion, with Wall Street analysts targeting modest growth from earnings of 42 cents per share on $10.9 billion in sales last year. During the past year, CEO John Chambers has refocused the company on its core networking business, leading to steady growth for the past several quarters.

Likely because of this return to its roots, Cisco’s earnings whisper number arrives slightly higher than the consensus at 49 cents per share. The company has topped Wall Street’s estimates in each of the prior four reporting periods by an average of about 12.5%, placing the whisper number well within reach.

Options traders tend to agree, as the put/call open interest ratio for the front three months of options arrives at 0.6. In other words, calls easily outnumber puts in the May, June and July options series. Sentiment is a bit tempered in the weekly series, with the weekly May put/call open interest ratio coming in at 0.82.

Taking a closer look at weekly options activity — since these traders likely are betting directly on CSCO’s post-earnings activity — we find that peak call open interest resides at the out-of-the-money 20 strike, totaling more than 12,000 contracts. By contrast, peak weekly May put open interest numbers 6,946 contracts at the in-the-money 19 strike.

Technically, CSCO has pulled back sharply during the past several weeks, following the broader market lower. As a result, shares are now perched just above potential support near $18.50, as well as their rising 200-day moving average. What’s more, CSCO’s 14-day RSI is boarding on oversold territory, hinting that buyers might be on the verge of returning.

With the company likely headed toward another Street-beating earnings report, and CSCO shares ripe for a return of buying pressure, traders might want to take a bullish stance ahead of the event. Options data indicates that the market is pricing in a post-earnings move of about 5.75%, meaning that a weekly May 19/20 bull call spread has a good chance of turning a profit.

At the close of trading on Tuesday, this trade was offered at 29 cents, or $29 per pair of contracts. Breakeven rests at $19.29, a gain of 3% from yesterday’s close, while a maximum profit of 71 cents, or $71 per contract, is possible if CSCO closes at or above $20 by the end of the week.

CA Inc.

While CA Inc. doesn’t carry the same weight as Microsoft (NASDAQ:MSFT[4]) in the software sector, the company still is a solid bellwether for the health of the software market. CA will enter the earnings confessional Thursday afternoon, with Wall Street looking for earnings of 49 cents per share, a rise of 2.1% from the same quarter last year. Revenue is expected to come in 5.3% higher at $1.19 billion.

Historically, CA has been solid on the earnings front, besting the consensus estimate in each of the prior four reporting periods by an average of more than 9%.

Despite its strong fundamental history, the brokerage community is far from enthusiastic when it comes to CA’s prospects. Specifically, analysts have doled out only four buy ratings, compared to nine holds and no sells. Furthermore, the consensus 12-month price target of $28 rests a mere 6.1% above CA’s close at $26.39 yesterday.

Indifference also is apparent in the stock’s options configuration. For instance, the front-month put/call open interest of 0.95 indicates that puts and calls are in near parity. A look at May open interest totals reveals that bears are a bit more negative than bulls are positive, with peak call open interest lying just overhead at the 28 strike, while peak put open interest arrives well below at the 24 strike.

Technically, CA has consolidated sideways since surging in the wake of the company’s last quarterly report. Furthermore, the stock’s 14-day RSI has declined to within striking distance of oversold territory because of the recent market selloff. CA currently is sidling between its 50-day moving average near $27 and solid support near $26. The annual high sits at $28.

Those looking to capitalize on another better-than-expected quarterly report might want to consider a May 26/28 bull call spread. This trade was last offered at 85 cents, or $85 per pair of contracts. Breakeven lies at $26.85, while a maximum profit of $1.15, or $115 per pair of contracts, could be realized if CA closes at or above $28 when May options expire.


Wall Street is predicting quite a plunge in NVIDIA (NASDAQ:NVDA[3]) first-quarter earnings when the company reports before the bell Friday. In fact, the consensus is forecasting a 54.5% drop to 10 cents per share from earnings of 22 cents per share in the year-ago period. Revenue is seen falling 4.8% year-over-year to $915.7 million.

Despite the dour outlook, NVIDIA is on solid fundamental footing from a historical basis. The company has topped expectations during the past four reporting periods, with an average upside surprise of 10.5%. This tendency to top the consensus estimate might be the reason NVIDIA’s whisper number is 20% higher at 12 cents per share.

Sentiment is mixed when it comes to NVDA. The brokerage community has issued 22 hold or worse ratings, compared to just 14 buys. On the other hand, options traders have a more positive outlook, with the stock’s front-month put/call open interest ratio arriving at 0.67. Keep in mind that May options traders are more likely to be targeting NVIDIA’s quarterly report, while analyst ratings typically have a much longer-term outlook.

From a technical perspective, NVDA has shed nearly 11% since the start of 2012. Because of the recent market weakness, NVDA’s 50-day and 200-day moving averages have completed a bearish cross, while the stock is now trading only about 8.6% away from a setting a fresh annual low. It also is worth noting that NVDA’s 14-day RSI is trading in oversold territory.

There is the possibility that NVDA will surprise to the upside Friday, but the market for high-end graphics processors (NVIDIA’s bread and butter) still is considerably weak and could remain so throughout the summer. In other words, keep an eye out for a weak forecast for next quarter.

Should the outlook remain poor for NVIDIA, a May 11/13 bearish put spread could provide options traders with a nice profit. At the close of trading Tuesday, this spread was offered at 79 cents, or $79 per pair of contracts. Breakeven lies at $12.21, while a maximum profit of $1.21 could be achieved if NVDA closes at or below $11 when May options expire.

As of this writing, Joseph Hargett did not have a position in any of the aforementioned securities, nor does he have plans to enter such a position in the next 72 hours.

  1. CSCO: http://studio-5.financialcontent.com/investplace/quote?Symbol=CSCO
  2. CA: http://studio-5.financialcontent.com/investplace/quote?Symbol=CA
  3. NVDA: http://studio-5.financialcontent.com/investplace/quote?Symbol=NVDA
  4. MSFT: http://studio-5.financialcontent.com/investplace/quote?Symbol=MSFT

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