Panic Pumps CSCO Options
At the beginning of
earnings season, you might expect the world to focus on Motorola
PowerRating), two companies due to report earnings today.
However, traders here on the floor are certainly not talking about neither
communications equipment, nor web portals, they are talking about NETWORKING!
The reason for that is Cisco Systems
PowerRating). CSCO fell nearly 9%
early this morning, rallied to even and then fell back to a loss of 2 5/8 after
the world speculated Chairman John Chambers would warn at the Morgan Stanley
conference today. Chambers said capital expenditures would impact CSCO and their
February earnings. The Street was looking for $.19, but look for more
downgrades, as we get closer to February 5.
Indeed, analysts used Chambers comments as a catalyst to downgrade shares of the
networking giant, as many cited revenue growth will disappoint investors due to
telecommunications companies slowing in purchasing new equipment.
Yesterday, CSCO option volatility was 78%, but donâ€™t be looking for anything
that â€œcheapâ€ today, as the sell-off has pumped February volatility up to
readings over 105%! Even the April volatilities are in the sky, as the
at-the-money APR 35s are trading for at 88%.
What does this mean for the average investor? Well for one, if you own CSCO and
youâ€™re nervous (who wouldnâ€™t be?), you could sell some pumped up Feb calls
against your holdings to cushion the downside. This isnâ€™t nearly as complete a
protection as a put purchase would provide, but you do benefit from the
additional premium versus the same covered write yesterday. In fact, the
February 35 calls would have been worth just 3 1/8 at 78% volatility and are
instead trading for 4 1/2 at the 105% level. Thus, the writer of the 35 calls
gets an additional 1 3/8 protection today.