As earnings season fades, traders hope for last big bang from tech titan
08/16/17

Second quarter earnings season is in its final act, but some traders are looking for an exciting finale in the tech space.

At least that’s what the options activity may be signaling in Cisco Systems (NASDAQ: CSCO), whose numbers are due tonight. The networking giant began Tuesday averaging fewer than 40,000 contracts per session over the preceding month. But yesterday volume surged to more than triple that amount, led by a single large transaction.

Going to work an hour after the open, traders sold about 19,000 December 35 calls for $0.29. They also bought a similar number of September 32 calls for $0.82 but in that case it looks like they closed an existing short position. Here’s what it likely means:

  • Owning calls fixes the price where a stock can be purchased. Selling them generates income but also forces investors to deliver securities if they rally to a certain level. 
  • The investor probably had about 1.9 million CSCO shares in their portfolio and had previously written the September 32s against the holding. Ever heard of a “covered call?” That’s what it was. 
  • Yesterday, they rolled the position higher. Instead of being forced to liquidate for $32, their potential exit is now raised by $3 to $35. Making the adjustment cost an incremental $0.53, which is the difference between the $0.82 paid and the $0.29 received.
  • CSCO ended the session up 0.79 percent to $32.09. 
Cisco Systems (CSCO) 1/5/17 – 8/15/17 chart

Source: OptionsHouse by E*TRADE

While technology has mostly played the rock-star sector all year, CSCO has missed most of the party. Sure, there was a brief rally in February amid hopes it would reinvent itself with software and security, but then came a gut-wrenching drop in May after guidance was cut.1 The stock has been trapped at its 200-day moving average ever since, as analysts muse that turnarounds don’t happen overnight. They also view the glass as somewhat half-full because management has a knack for keeping profitability on track.2

Bottom line: CSCO reports tonight, and at least one big trader is positioning for a move higher. 

 

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1. Reuters: Cisco profit beats on strong demand for security products. 2/15/17. Marketwatch: Cisco drops 5% after forecast shows revenue decline increasing. 5/17/17.

2. Credit Suisse: F4Q17 Preview – Continued SP Weakness. 8/9/17. Bank of America Merrill Lynch: Takeaways from Cisco Live: Transitioning to become a software player. 6/30/17.