The Torture Chamber


As we have head into Cisco's earnings print tonight, the implied move int he options market has ticked up a bit from ~2.5% last last week to almost 5% which is a bit rich to the avgerage over the last 8qtrs of about 4%.

Last Friday on the show, Dan Nathansuggested buying the at-the-money straddle to take advantage of what he believed has the potential to be a volatile move after earnings based on CEO John Chamber's commentary and the options market underpricing such potential for a move.

Dan referenced two instances in the last three years where Chambers commentary moved the stock significantly the next day and over the next six months; the Summer of 2006 markets got creamed and tech was in a malaise; and Aug 8, 2006, when Chambers called the bottom on their earnings call based on increased demand from emerging markets, and the stock went up 14% the next day and up 68% over the next 6 months!


The other event, NOV 7, 2007. In the midst of the subprime crisis, CSCO was trading at five-year highs.

Chambers called the top by signaling a significant slowdown in orders from financial services and auto companies...and the Stock went down 10% the next day and down 58% over the next 6 months!

While the implied move has ticked up, meaning the prices Dan suggested paying for the straddle has gone up, dan hasn't changed his view on the potential for the stock to move one way or another post the conference call.

Questions, comments send them to us at: optionsaction@cnbc.com

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    Melissa Lee is the host of CNBC's “Fast Money” and “Options Action.”

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