,der auf Risiken hinweist ,CSCO nachbörslich bereits leicht im Minus -1,4%
Those numbers - even with Cisco (CSCO: news, chart, profile) meeting Wall Street expectations for income -- may not be enough to prop up the company's shares, says one quantitative analyst.
That's because the open interest on Cisco's August call option contract, strike price $20, is 138,000. Open interest is the total number of options contracts that have not been exercised, closed out or allowed to expire.
"That's enormous," says Christopher Johnson, managing quantitative analyst at Schaeffer's Investment Research in Cincinnati. "What that tells us is that Wall Street is really expecting Cisco to blow the door off expectations. We certainly don't expect that to happen."
Options activity usually increases as a company prepares to report earnings. But rarely does open interest in a company's call options exceed 100,000. Last month, for the first time ever, three call options contracts for a company exceeded 100,000.
Call options are a bet on a rising stock price. The record-setting company on the three call contracts was computer chip maker Intel Corp. (INTC: news, chart, profile) Investors were heavily betting that the company's shares would exceed three different strike prices by the third Friday in July.
"I think it showed that the market was too hopeful for Intel," says Johnson, who sees a similar pattern with Cisco. "We call it the slope of hope."
In the case of Cisco, whose quarterly report was eagerly awaited Tuesday afternoon, investors may be too complacent about the company's networking equipment business.
Investors who buy the Cisco August 20 call option (CYQ=HD: news, chart, profile) expect Cisco shares, now at $19.44, to close above $20 by Aug. 17. For those investors to make money, Cisco's chief executive, John Chambers, "would have to come out and reiterate positive year-end numbers, which would be a rare occurrence in this market," the analyst said Tuesday. "We are going to see selling in Cisco."
Cisco's fourth-quarter sales fell to $4.3 billion, a 25 percent drop from the previous quarter. Chambers said Tuesday that his company's long-term visibility, or market outlook, was "challenging." (See the report.)
Johnson says call options trading on the August 20 contract far outweighs the activity in its opposite, the Cisco put contract. (Puts are essentially contracts that increase in value as a stock's price drops.) The open interest in August $20 Cisco call contracts outnumbers the Cisco puts by about a 6-to-1 margin.
The Cisco August 20 call contract closed Tuesday at 65 cents, down 23 percent for the day. At least 63,700 of the contracts changed hands Tuesday. The steep decline in the options contract came as Cisco shares sold off before the release of the company's quarterly report.
This may sound like hocus-pocus, but professionals keep close track of options activity in individual company shares. Johnson and the firm he works for, founded by strategist Bernie Schaeffer, see too many investors pinning their hopes on improved earnings outlooks.
"Investors are hoping earnings will pull the markets out of the tank, but we don't think we've seen enough fundamental good news," says Johnson, who with his boss, Schaeffer, attended the San Francisco Money Show this past weekend. "I mean, some tech companies are giving up visibility going into the end of the year. There is an awful lot of bad news and investors are still very hopeful. That's not natural."
Johnson says he won't rule out a return to the lows Nasdaq stocks sank to in March.
The analyst sees further damage for both Intel and Cisco shares. Cisco's stock, if it falls to $15 from its current $19.44, would be a windfall for put options investors who are betting against the world's largest networking equipment company and a disaster for those optimists holding the calls.
