Cisco Systems’ Resurgence May Just Be Getting Started

• Cisco stock was under pressure in 2019 because of the US-China trade war.
• The options market has a 9% move in March priced in.
• Options traders are betting on the stock’s rise by the middle of March.

Cisco Systems‘ (CSCO) shares had a tough 2019. CSCO stock rose only 11% over the year versus a 29% gain for the S&P 500 (SPX). This weak performance was generally caused by the US-China trade war, affecting Cisco’s sales. However, some traders from the options market appear to be betting on Cisco’s stock rise by the middle of March. More precisely, they expect its equity to rise by the expiration date on March 20.

Let’s look at CSCO’s options chain to examine the expected price move and option traders’ sentiment for the stock. 

Considering the March 20 options, we can see a bid/ask for the call option with the strike price of $50.00 of $1.08/$1.09. We can also realize a bid/ask for the put option with the strike price of $50.00 of $3.25/$3.35. Keep in mind that the options strike is closest to the TSLA price of $47.64 as of Friday, January 3. We can figure out the expected price move utilizing the mid-prices of those options:

3.30 (50.00 put) + 1.085 (50.00 call) = 4.385/47.25 = 9.2%

This calculation implies that CSCO’s stock price could increase or decrease by about 9% by the March expirations, considering the $50.00 strike price. Given that this assessment utilizes the options long straddle strategy, this estimation would place CSCO stock in a trading range of $42.99–$51.93 by the expiration date.

Pay attention to the number of open call and put contracts as well. In our case, the number of open call contracts at the $50.00 strike price outweighs the open put contracts by approximately 15x. On Friday, there were 29,004 open calls to 1,888 open puts. A buyer of the $50.00 strike price calls would need the stock to rise to around $51.08 by the expiration date to break even. This divergence notes that options traders appear to be bullish on Cisco stock. 

Finally, at a $50.00 strike price that expires on March 20, the implied volatility levels for the options stand at 22.66% for the stock. For instance, the SPDR S&P 500 Trust ETF’s (SPY) implied volatility level stands at 12.95% for the same expiration. This number suggests that traders expect the stock to oscillate at a hotter pace than the overall market by approximately 2x. 

During Friday’s trading session, there was a purchase of about 5,500 $52.50 March 20 call options for $0.40 per contract. Moreover, this trade carries the total number of open contracts to about 19,935. This means that the bet has a total dollar value of about $1 million, describing this transaction as a sizeable, bullish bet.

On Friday, the stock was priced at $47.64. This means that if the stock can reach the strike price, the common stock has an upside potential of about 11% from current levels. 

In addition, the open interest levels for March 20 $42.50 calls increased substantially early today. According to data from Barchart.com, the open contracts increased by 2,584 contracts to about 7,447. For the buyer of the $42.50 calls to earn a profit, CSCO stock would need to rise to around $48.30. That shows a gain of about 1.4% from the current levels.