Options Straddle Takes Advantage Of A Big Move In Cisco Stock

Network equipment giant Cisco Systems (CSCO) will report its October-quarter earnings after the close on Wednesday. Earnings are estimated at 84 cents per share on revenue of $13.31 billion.

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With the options market currently implying only a 4.9% move on the event, investors can consider a long straddle to take advantage of a larger-than-expected move (either higher or lower) on Cisco stock.

A straddle is an options strategy where an investor takes no view of the up or down direction of shares on inception. Instead, the trader believes shares will move more than the market is anticipating in either direction.

With Cisco stock trading near 46 a share Friday, investors can consider placing a straddle by buying the 46 call and 46 put on the Nov. 25 expiry. This trade can be placed for a debit of $2.75, which coincides with a maximum loss of $275 if the shares trade exactly at 46 on expiration.

An investor will earn a profit if Cisco trades above 48.75, or below 43.25 on expiry. The maximum profit on this trade is theoretically unlimited.

Cisco Options Appear Cheap Compared To Prior Moves

Cisco stock’s implied earnings move of 4.9% appears low compared to an average move of 5.8% for the company. Furthermore, recent earnings results have caused even more volatile moves. Shares moved 13.7% May 19 after the fiscal Q3 announcement, which was followed up by a 5.8% move with the most recent report on Aug. 18.

Generally speaking, to trade an earnings event investors would trade the options that expire following the event, in this case the Nov. 18 expiry. Nevertheless, in this case the Nov. 25 options appear more attractive as the forward volatility (between the two expirations) is only 22%. This gives investors more time in the trade without paying that much more in option premium.

Any volatility in the shares could come from an update in guidance. Last quarter Cisco released its 2023 sales growth to come in between 4%-6%. Conversely, with the company already releasing 2023 guidance, the lower implied move might be justified, especially if there are no big surprises.

Cisco stock currently has an IBD Composite Rating of 74. The stock is down 27% year-to-date, although it has been trending higher now above its 50-day moving average, but below its 200-day line.

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