Shares of Cisco Systems have under-performed the Nasdaq Composite in a fairly meaningful way so far in 2015, up only 3.6% to the Nas up up 7.2%. Despite rising nearly 30% from the 52 week lows made last October, the stock has been range-bound in 2015 spending most of its time trade between $27 and $30:
There was a large trade today in the options market that caught my eye. A CSCO investor sold calls in good size against a long stock position with the intention to add some yield to their holding. When the stock was $26.90, 100,000 of the August 30 calls were sold at 50 cents to open. If the stock is below $30 on August expiration then the trader will receive 50 cents, or $5 million, adding about 1.7% yield to the stock in the next two months. That would be in addition to the stock’s 21 cents quarterly dividend, or a little less than 1% to be paid on July 22nd.
Who am I to argue with a holder of at least 10 million shares who wants to add some additional yield, while also creating a little buffer to the downside, but the choice of strikes and expiration seem odd to me. First, CSCO should report their fiscal Q4 results in mid August, the expiration of the call sale, which could serve as the catalyst for the stock to attempt another breakout at $30 meaning the strike chosen could be vulnerable to an event gap, which is never great.
Also on a very long term level, $30 represents a massive breakout level, which is just an odd strike to sell so short dated:
I suspect this investor will NOT be short this strike into earnings as it would be silly to potentially cap the upside, for such little reward. As we get closer to CSCO’s Q4 earnings we will likely see buyers of this strike option which could make it attractive for those looking to express a bullish view into the print.
Here is a two day chart of the price of options for the Aug 30 call, down 1 point after today’s sale:
[caption id="attachment_54200" align="aligncenter" width="600"]
CSCO Aug 30 call 2 day chart of implied volatility from Bloomberg[/caption]
Here is a one year chart of 30 day at the money implied volatility for CSCO options, which shows that prices get to the mid 20s prior to earnings (highlighted in green):
[caption id="attachment_54201" align="aligncenter" width="600"]
CSCO 1yr chart of 30 day at the money Implied Vol from Bloomberg[/caption]
As we get closer to Q4 earnings and prior to this investor buying back these options, if the stock is still in striking distance of the $30 strike this could be the option to own for those looking for earnings to be a positive catalyst.