Cisco Systems, Inc (NASDAQ: CSCO) announces earnings today after the market closes. While the actual results are unknown, traders are positioning themselves ahead of the report to profit. The great thing about the options market is that you can take directional or non-directional trades. You can play volatility dynamics or just play the expectation that the price doesn’t move. On Tuesday, the option activity appears to be indicating a large bearish move over earnings.
Cisco has a solid history of beating analyst estimates, but this isn’t like any other quarter. Over the past 60 days, the EPS estimates have remained steady, which means that there hasn’t been any change in expectations for a while. While that doesn’t necessarily mean bad news, it does mean that the bar hasn’t been lowered throughout the course of the pandemic.
On Tuesday, the put option activity was 2.6 times the average with over 70,000 contracts traded and 50% of the volume getting filled between the bid and ask. Of particular interest is the 14 AUG 20 46.50/44.50 long put vertical that had 5,000 contracts filled between the market for $0.49. By the end of the session, over 10,000 contracts traded on each strike price against significantly lower open interest.
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Action to Take: The trade is indicating a bearish expectation for the stock over the earnings. The current expected move based on the 14 AUG 20 expiration implied volatility is $2.75. With the stock closing at $47.19, that places the lower bound of the expected move near the max gain of the spread of $44.50.
Speculators may want to consider taking the same trade but giving a little more time to make the move. The 18 SEP 20 46/44 long put vertical can be bought for $0.62. Consider closing early for $1.10 or more following the report on Thursday.