A giant in networking equipment Cisco Systems (CSCO) will report its earnings for the quarter in October after the close on Wednesday. Earnings were estimated at 84 cents per share on revenue of $13.31 billion.
With the options market currently suggesting only a 4.9% move from the event, investors may consider a long straddle to take advantage of a larger-than-expected move (higher or lower) in Cisco stock.
A straddle is an options strategy where the investor does not consider the up or down direction of the stock at the outset. Instead, the trader believes the stock will move more than the market expects in either direction.
With Cisco stock trading near 46 per share on Friday, investors may consider placing a straddle by buying 46 calls and 46 puts on the November 25 expiration. This trade can be made for a debit of $2.75, which equates to a maximum loss of $275 if the stock trades exactly at 46 at expiration.
The investor will take profit if Cisco trades above 48.75 or below 43.25 at expiration. The maximum profit from this trade is theoretically unlimited.
Cisco’s options seem cheap compared to previous moves
Cisco stock’s expected earnings move of 4.9% looks low compared to an average move of 5.8% for the company. Additionally, recent earnings results have sparked even more volatile moves. Shares moved 13.7% on May 19 after the fiscal third-quarter announcement, which was followed by a 5.8% move with the latest report on August 18.
Generally speaking, to trade an event for a profit, investors would trade the options that expire after the event, in this case the November 18 expiration. Nevertheless, in this case the November 25 options look more attractive, as the forward volatility (between the two expirations) is only 22%. This gives investors more time in the trade without paying much more premium for options.
Any volatility in the stock could come from a guidance update. Last quarter Cisco has announced its sales growth for 2023, which will be between 4%-6%. Conversely, since the company has already released guidance for 2023, a lower implied move may be justified, especially if there are no major surprises.
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