CSCO Analysis

Cisco Systems Inc. (CSCO)

Update 11/16/2017: CSCO beat its earnings estimate of $0.60 by a penny, coming in at $0.61. Shares opened $1.93 higher after the announcement. With an opening gap that large, I exited and took the loss.

CSCO went into the announcement with a neutral rating from Zacks with a small expectation of an upside earnings surprise (0.29 on the earnings surprise predictor) and a beta of 1.15.

The share price rose by $1.77 from the pre-earns close to the first close after earnings were published. The movement overshot the profit zone by 27 cents and the expected move, with 85% confidence, by 69 cents. It remained, however, within the average move and central tendency of the four prior quarterly earnings announcements.

Shares rose by 6.8% over my holding period of less than a full day, or a +2,484% annual rate. The options position produced a -35.1% loss on debit for a -12,824% annual rate.

CSCO publishes earnings on Wednesday before the opening bell.

I shall use options that trade for the last time nine days hence, on Nov. 24.

Implied volatility stands at 27%, which is 1.9 times the VIX, a measure of the volatility of the S&P 500 index.

CSCO’s IV stands at the peak of its annual range and its most recent broad movement.

The price used for analysis was $33.90.

Premium: $1.44 Expire OTM
CSCO-iron fly Strike Odds Delta
Calls 37.00 91.8% 9
Break-even 35.44
Short 34.00 52.7% 50
Short 34.00 47.4% 50
Break-even 32.44
Long 31.00 91.2% 8

The premium is 48% of the width of the position’s wings.

The risk/reward ratio is 1.1:1.

The zone of profit in the proposed trade covers a $1.50 move either way. The biggest immediate move after each of the past four earnings announcements was $8.39 and the average was $3.23. After eliminating the maximum and minimum post-earnings movements, the central tendency is $1.87.

The expected move covering 85% of occurrences is $1.08, within the profit zone.

The bid/ask spread is 3.5%.

Decision for My Account

I have entered a position on CSCO as described above. The 85% confidence expected move is within the zone of profit, although the post-earns moves over the past year’s earnings announcements have been slightly wider. I put greater store by the expected move metric than by the historicals. The stock at the time of entry was priced at $33.95.

By Tim Bovee, Portland, Oregon, November 15, 2017


Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.

No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decisions for his or her own account, and take responsibility for the consequences.

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