February 8, 2012 / 2:48 PM / 6 years ago

Optimism springs eternal in Cisco shares ahead of results

NEW YORK/CHICAGO (Reuters) - Cisco’s earnings have had a way of crushing the dreams of optimists in the last two years.

The Cisco logo is displayed at the technology company's campus in San Jose, California February 3, 2010. REUTERS/Robert Galbraith

Shares of the computer networking giant have often rallied ahead of its earnings report, sparking bullish sentiment among options players, only to fall sharply after the company fails to meet lofty expectations.

There are fears this will happen again when the company reports results after the close of trading on Wednesday. The stock has been on a roll, rising more than 50 percent from a 52-week low to levels not seen in a year.

“There is a lot of optimism from option traders heading into earnings,” said Joe Bell, senior equity analyst at Schaeffer’s Investor Research in Cincinnati. “If the results do not meet expectations, there may be a lot of downside.”

The day after five of the last six earnings reports, Cisco Systems Inc shares have been hit hard. The stock fell 10 percent on August 12, 2010, 16 percent on November 11, 2010 and 14 percent on February 10, 2011, according to Reuters data.

The one exception in the last six quarters was in August 2011, when the shares gained 16 percent the day after results.

Wall Street expects Cisco to report a stable quarter, buoyed in part by improving enterprise demand in the United States.

Cisco has outperformed its peers this year, rallying 11.7 percent, and options activity has been tilted to the bullish side.

Heading into Wednesday’s earnings report, investors bought 3.61 calls for every put on three U.S. options exchanges as new positions over the past 10 trading sessions, according to Schaeffer’s data. That gauge clocked in higher than 79 percent of the readings taken during the past year.

Sentiment in Cisco is among the most optimistic in the S&P 1500 index, “so even a slight disappointment in earnings could whack the stock,” said Jason Goepfert, president of SentimenTrader.com in Minneapolis.

Goepfert’s sentiment score for Cisco is at 84 percent. He views 80 percent as extremely optimistic and under 20 percent as extremely pessimistic.

The score is derived by averaging seven measures of sentiment in each stock, which includes the put-and-call open interest and put-and-call volume over the past week.

Other tech giants, such as Microsoft Corp and Apple Inc, have hit 52-week highs as market sentiment has improved.

Goldman Sachs Group’s derivative strategists recommended that investors consider Cisco calls “to benefit from strong underlying fundamentals this quarter,” they said in a report on Wednesday.

But a closer look at the options market suggests some worry. The put skew - a measure of the relative cost of bearish put options versus bullish call options - is elevated. That suggests that even though call activity is dominating, investors are spending more money to protect against a possible negative surprise.

Ryan Detrick, senior technical strategist at Schaeffer’s, said there is “definitely a big skew currently, as puts are more expensive than calls by the widest margin since August 2011. There’s no doubt investors are paying up for puts in front of this earnings report, but what is interesting is we’ve also seen a good deal of call buying relative to put buying over the previous two weeks.”

Expectations are for a post-earnings move of about 6 percent for Cisco shares, up or down, based on Tuesday’s activity of weekly options that expire on Friday. This is below the average 10 percent move for the past four quarters.

Cisco shares were flat at $20.20 in morning trading on Wednesday.

Option volume was double the average daily turnover on Tuesday, with about 152,000 calls and 60,000 puts traded, according to options analytics firm Trade Alert. Its most active options was February $22 strike calls, followed by February $21 calls.

Reporting By Angela Moon and Doris Frankel in Chicago; editing by Jeffrey Benkoe and Dan Grebler

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