Cisco options suggest about 5 pct move after earnings
* Implied earnings move rises to 5 pct from 3 pct-Goldman
* Average realized move is 3 pct over past 8 qtrs-Goldman
* 10 pct move after last qtr results may be anomaly-trader
By Doris Frankel
CHICAGO, Nov 10 (Reuters) - Option traders were caught off-guard last quarter when Cisco Systems Inc (CSCO.O) shares slumped about 10 percent after its earnings report, far sharper than their expectations.
They don't expect a repeat this tine, when Cisco, a technology bellwether, reports after the close on Wednesday.
Cisco's options are pricing in a potential move of about 4.6 percent to 5 percent in the stock in either direction, according to option traders.
Investors are focused on whether Chief Executive John Chambers will sound a bit more cheerful about the technology sector. Last quarter, Wall Street was spooked by Chambers' unusually cautious comments about the sector. For details, see [ID:nN02248119]
"Anyone who follows Cisco knows the real drama comes with CEO Chambers' comments following the statement as he always gives incredible insight regarding the health of the technology sector and the market overall," said TD Ameritrade chief derivatives strategist Joe Kinahan.
Analysts, on average, expect earnings of 40 cents per share, up from 36 cents a year ago, according to Thomson Reuters I/B/E/S.
Option traders remember the last earnings cycle, when they got it wrong.
"It was a much larger move that what they had priced in originally," said Steve Claussen, chief investment strategist at online brokerage OptionsHouse LLC in Chicago.
The market expected a 4.1 percent move on an absolute basis based on the weekly at-the-money straddle prices at that time, said Steve Place, a founder of investingwithoptions.com in Mobile, Alabama.
Cisco shares dropped nearly 10 percent on Aug. 12, one day after surprising weak fourth-quarter earnings report and a pessimistic outlook. [ID:nN11174722]
"The options market is assuming that the large gap down in the stock we saw last quarter was an anomaly," Place said.
"This earnings event is interesting because the previous results on Aug. 11 created that huge gap, the worst since at least 2002," he said. "Often in the options market after a large move from previous earnings is rich option premiums. However, we are not seeing that as much in Cisco."
Goldman Sachs equity derivative strategists estimated Cisco options imply a 5 percent move on earnings, higher than the 3 percent median move on earnings over the past eight quarters.
Expectations appeared to have risen ahead of results. The implied move has risen over the past few days to 5 percent from 3 percent, they said on Wednesday.
Goldman suggested shareholders sell January $25 calls, collecting 77 cents based on Tuesday's close of $24.35. The analysts expected Cisco to remain in a range.
The main risk in a covered call strategy, which involves selling a call option on a stock position, is that Cisco stock could rally meaningfully above the call strike price before the short calls expire.
Many traders have been using popular weekly options that expire this Friday as a way to gain exposure to short-term moves.
The market has priced an average move of 4.6 percent by Friday as of Tuesday's close, based on the weekly $24 and $25 strike straddles, Place said. "As long as Cisco stays in between $25.33 and $23.12 by Friday, then the volatility sellers will be right."
The November weekly straddle at the $24 put and call strike that expires this Friday is pricing in a potential move up or down of $1.18, or 5 percent, said Jon Najarian, co-founder of website optionMonster.com in Chicago.
A trader purchasing a straddle -- a combination of a call and a put with the same strike price and expiration date -- is not betting on direction but share volatility.
An equity call option conveys the right to buy shares at a fixed price up to a certain date, while a put grants the right to sell shares at a fixed price any time until expiration.
Cisco shares slipped 0.2 percent to $24.40 in afternoon trade. (Reporting by Doris Frankel; editing by Jeffrey Benkoe)
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