CSCO Unusual Option Activity

Cisco (CSCO) saw its price fall over two percent on Tuesday as it broke its $37.60 support. The high volume selling masked a big day in the options market for the company. The juxtaposition of a falling share price and bullish option interest is an interesting combination as the price marches lower toward the March low.

While the company is a large tech company, it’s also a strong dividend play for income investors. The company is about two weeks out before its next earnings report on November 12. This creates an opportunity for both option traders and stock investors.

CSCO Option Activity

Cisco finished with call option volume of over 2.4 times the average. That’s a significant amount of volume as put option volume came in slightly higher than average. Looking at the type of activity that was placed, about 50% of the call volume was filled at the ask price. That level of activity filling at the ask is a strong indication of call option buying. A significant portion of the call activity centered on one particular option contract.  Here are the details of the activity:

• 15,000 20 NOV 20 $38 call mostly BOT early @ $1.33 to $1.48 against open interest of 1,841

The contract volume for the day totaled over 50,000 contacts. The price of the option gives a breakeven price for the call contract of close to $39.50. With the price closing at $36.87, that’s nearly $3 higher than its current price.

CSCO Technical Analysis

Looking at the earnings price statistics for Cisco over the past three years shows how the options pricing reflects on historical price movement. Here is a summary of the earnings moves:

• Gaps Up: 7
• Ave Gap Up: 4.64%
• Max Gap Up: 7.07%
• Gaps Down: 5
• Ave Gap Down: 6.29%
• Max Gap Down: 8.96%

A 6.29% gap lower in the price would place the stock around $34.50. The March low is $32.40 but only had one close below $34. The area near $34 is significant historically as it’s near the 61.8% Fibonacci retracement level of the long-term uptrend since the 2011 low.

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CSCO Fundamental Analysis

Cisco has a 5-year projected EPS growth rate of 6.18%. That doesn’t exactly make this stock a growth company. That is further confirmed looking at its 2021 and 2022 revenue growth rates of a decline of 2% and a 3.9% increase, respectively.

While this isn’t a growth-oriented company, it has grown its revenue and EPS consistently for many years. That consistency has led the company to pay a dividend, which is currently at 3.91%. The yield makes this a solid company for income investors.

An analysis of the cash flow statement for CSCO shows that the company has generated a significant amount of free cash flow for years. The trailing twelve-month (TTM) free cash flow is $14.66 billion. With the company paying out $6.02 billion in dividends, the company is generating more than enough free cash flow to pay and grow its dividend.

CSCO Trade Analysis

The call option trading on Tuesday is a speculative trade looking for immediate upside. However, another approach can include a bullish bias but a desire to potentially buy the stock at a lower price. One such strategy is a short put.

The $35.50 put strike price for the 20 NOV 20 expiration pays around $1.13 per share. The sale of a put obligates the seller to buy 100 shares of the stock at the strike price. If the stock were to fall and the put was exercised, the breakeven price is $34.37. Buying the stock at a net price of $34.37 is near the March low and would carry a dividend yield of 4.19%.

For someone looking for an income investment, the sale of put can provide an ability to buy a stock at a lower price and a higher dividend yield. If the price closes above $35.50 by expiration, the trade has a 3.18% return on risk in less than 30 days.

Conclusion

Cisco is a company that pays a relatively high dividend in a low interest rate environment. The ability to buy the stock at a lower price and get paid to do it can be an attractive combination. In this case the breakeven places the net purchase price near the average bearish gap on an earnings and near major support of $34.