Update: CSCO: FYQ1 Earnings Nov 9th, I Get Long Exposure Through Short Dated Call Spreads

by Dan November 10, 2011 9:37 am • Commentary

Update Nov 10th 2011: CSCO is up 6.5% at 18.80 this morning on a strong qtr and better than expected guidance…this is the second qtr in a row where they beat expectations (albeit lowered ones) and investors are responding favorably.  The Nov 19/20 Call Spread that I bought on Friday for .20 is now worth .21 on a mark to market basis…..I am going to sell half the spread at .21 for basically break-even and let the other half ride into next week’s expiration.  At this point it is a market call and I am not certain the markets hold their ground at these levels.

Some may want to let this ride, I am particularly bearish at the moment and don’t mind cutting longs.  I played for the event and got a decent move but not exactly what I was looking for so no harm no foul, I am gonna let half ride.

Barron’s had a good quick summary of the report (here).

Nov 4th 2011: CSCO: FYQ1 Earnings Nov 9th, I Get Long Exposure Through Short Dated Call Spreads

CSCO reports their fiscal Q1 earnings Nov 9th after the close.  The options market is implying about a 6% move following earnings which is shy to the last 4 qtr’s avg of about 12.5% and the 8qtr avg of about 8.5%.

-As you can see from the data above CSCO has been amazingly volatile following earnings for a large cap tech stock over the last 2 years…..I think there is a good chance that some of the guess work has come out of the name as estimates have grinded lower for the upcoming fiscal year and expectations could finally be at point where the company is set to have a few consecutive beats.

-When you look at the chart below you see that much of this volatility post earnings had to do with an epic fall from grace over the last 2 years with the stock falling a little more than 50% peak to trough.

2 Yr CSCO chart showing earnings gaps from Bloomberg


-Since bottoming in Aug off of 2 year lows the stock has performed very well up about 35% and appears to be making a little bit of a head and shoulders bottom with 18.00 serving as the neckline with the left shoulder formed in June and the right shoulder formed in early Oct.


1 Yr CSCO Chart Head and Shoulders from Bloomberg


CSCO overshot very negative sentiment on the downside back in Aug and now with the stock lagging the Nasdaq, still down 11% on the year vs the index that is up 1%. the stock could play some catch up if the Street needs to get re-weighted in the name.

CSCO’s earnings guidance will likely be the key to the story and if the company can continue to demonstrate some incremental operating improvement as a result of their restructuring initiatives, coupled with an evidence of revenue growth opportunities from their anemic low single digit levels, the stock could make a move back towards the unchanged mark on the year.

TRADE: CSCO ($18.00) Bought the Nov 19/20 Call Spread for .20

-Bought 1 Nov 19 Call for .30 (30 delta option)

-Sold 1 Nov 20 Call at .10 (13 delta option)

Break-Even on Nov Expiration;

Profits above 19.20 and btwn 20 make up to .80 above 20 make full .20

Losses btwn 19 and 19.20 lose up to .20 (that is your max loss) and below 19 lose full .20

TRADE RATIONALE: the stock is extended and while most signals point to a turn around on the “factors that they can control” (Their CEO speaks to that point on every conf. call) there is clearly the potential for some headwinds as it relates to telecom providers cap-ex and some pockets of softness in Government and out of Europe.

I want to define my risk and not be a monkey here and chase a stock that has had a massive run….I was fortunate enough to be long back in Aug and have been waiting for a time to get back in…..I would have much preferred to do so at lower levels but if we get any resolution in the coming days to the situation in Greece, investors could look to play some catch in names like CSCO that have the potential to outperform given lower expectations.

I like the 4 to 1 pay out if the stock out-performs the implied move and only risking .20 if I am wrong on direction.