Friday, December 17, 2010

Cisco Systems (CSCO) - Depressed Vol and Earnings Gaps

CSCO is trading $19.59, down 0.8% with IV30™ unched. The LIVEVOL™ Pro Summary is below.

I found this stock using a real-time custom scan. This one hunts for low vols.

Custom Scan Details
Stock Price >= $7 <= $70
IV60™ >= 1
IV60™ - HV60™ <= -8 >= -40
HV180™ - IV60™ >= 8
Average Option Volume >= 1,200
Industry != Bio-tech

The snapshot of the scan is included (below) in case you want to build it yourself in Livevol Pro™.

The goal with this scan is to identify intermediate-term implied vol (IV60™) that is depressed both to the intermediate stock movement (HV60™) and the long term trend in stock movement (HV180™). I'm also looking for a reasonable amount of liquidity in the options (thus the minimum average option volume) and want to avoid bio-techs (and their crazy vol).

The CSCO Charts Tab is included (below). The top portion is the stock price, bottom is the vol: IV60™ - yellow vs HV60™ - blue vs HV180™ - pink).

We can see:
HV60™: 40.53
HV180™: 35.56

So, IV60™ is depressed relative to the intermediate term and long term realized movement of the stock. Also note that the stock has gapped down after the last two earnings releases. It's this move that has HV60™ (and HV180™ to a lesser degree) elevated.

HV180™ (the long-term trend in realized stock movement) went from ~25 to ~28 after the 8-2010 earnings cycle, and then from ~28 to ~35 after the most recent earnings cycle (11-2010). It feels like a purchase of 25 vol would be "fair value" excluding the big earnings moves, and with the earnings moves is cheap.

Also note that after the 8-2010 earnings gap down, the stock made it almost all the way back to the original price pre-earnings. Hmm...

Finally, let's look to the Options Tab (below).

So the Feb options are priced at around 27 vol.

Possible Trades to Analyze
1. If you want to bet that either:
(a) CSCO will move on earnings again
(b) CSCO will slowly meander back to the stock level pre-earnings collapse (i.e. ~$24)
Buy the Feb 19/20 strangle for $1.32 or ~ 27 vol. This can be closed pre-earnings if CSCO stock moves away from these levels, or held into earnings for a bet on a stock move. Note that this trade does have a time decay element.

2. If you want to bet that CSCO makes its way back to ~$24 before the next earnings cycle (like after the 8-2010 collapse):
Buy the Jan 20 calls for $0.37 or 22 vol. That feels like a cheap (ish) bet. Obviously this carries a delta - it's a bet that the stock moves up.

It's also totally reasonable to just wait and see what happens to stock and the Feb options for a few weeks. Maybe there's a better entry, or there's just no trade at all.

This is trade analysis, not a recommendation.

Follow Live Trades and Order Flow on Twitter: @Livevol_Pro

Legal Stuff:

No comments:

Post a Comment