Goldman sees an options play on Cisco ahead of earnings

Published Thu, Nov 11 20213:17 PM EST

Jesse Pound @/in/jesse-pound @jesserpound

Earnings season may be winding down, but a major tech company set to announce results next week could be a big opportunity for options traders, according to Goldman Sachs. Cisco is scheduled to report its fiscal first-quarter results on Nov. 17. Goldman analyst Rod Hall has a buy rating on the stock, and his optimism about the upcoming report caught the eye of the firm's derivatives team led by Vishal Vivek and John Marshall. "Rod believes the increasing share of software in subscription revenues mix can drive [gross margin] expansion, helping the company grow EPS above its guided 5%-7% range. He sees additional upside from a long campus switching upgrade cycle," the firm said in a note to clients on Wednesday. Those high expectations are not reflected in the options market, where traders seem to be expecting a smaller-than-average move, Goldman said. "CSCO options imply +/- 4.9% move between now and 19-Nov, below its 8Q earnings-day move of +/- 5.8%. One-month implied volatility of 26 is only at median levels relative to the past two years, indicating muted options market positioning ahead of earnings. With the stock underperforming the broad S & P 500 by 5% since the 15-Sep analyst day, we see potential for earnings driving upside in the near-term," the note said. The firm recommended that options traders consider the November $57.50 calls, which were about $3 out of the money when Goldman made the call on Wednesday. Cisco shares were trading just below that strike price on Thursday. A call option gives the holder of the contract the right to buy a stock at a set price in the future. It serves as a bet that the stock will rise above that strike price, allowing the trader to buy shares at a discount. With call options, there is limited risk. If the stock falls and the option expires out of the money, investors will only lose the premium paid to buy the options contract. The trade becomes profitable when the stock rises, and the difference between the share price and the strike price exceeds the premium. -CNBC's Michael Bloom contributed to this report.

A man passes under a Cisco logo at the Mobile World Congress in Barcelona, Spain February 25, 2019.

Sergio Perez | Reuters

Earnings season may be winding down, but a major tech company set to announce results next week could be a big opportunity for options traders, according to Goldman Sachs.