Cisco CEO John Chambers’ comments that public sector spending will remain weak triggered a sell-off in his company’s stock and above normal action in Cisco options Tuesday.
“Public spending will stay tough this year – I wish I could give you a different answer to that – it’s probably going to get tougher before it gets better,” says Chambers , speaking at a Wells Fargo event.
The continued slowdown in public spending is not a surprise according to Shebly Seyrafi, FBN Securities Managing Director of Technology Infrastructure. The “company has been doing well especially since the early part of 2011,” he says noting that the spending comments might explain today’s price action, but that the stock remains attractive.
With about a fifth of Cisco’s revenue coming from public sector spending, the “worse segment is getting a little worse,” he says. “But most of their business is doing fine.”
Seyrafi rates Cisco an “outperform” with a price target of $27 a share.
As Cisco’s stocks traded on Chambers’ comments, there was heavy action in the options.
Traders noted that over 15,000 “weekly” $21 calls traded, well above normal activity and more than the open interest at the start of trading. The “weekly” calls are very short term options expiring April 5.
Streetinsider.com, a subscription service also noted longer-dated action in June 22 calls and June 20 puts with implied volatility near 24 percent , well below its 26-week average of 30. Implied volatility trading below the actual historic volatility of the underlying security suggests traders expect price action to quiet down going forward. 22,000 contracts of both strikes had traded by the end of the session.
Tim Biggam, Trading Block Options Strategist says that Tuesday’s trading implies traders are “harvesting” premium, by selling the shorter dated calls and getting into a longer dated strangle by buying the June calls and puts. When investors sell calls for premium, it usually indicates they do not see a short term rally in the stock.
Biggam expects continued pressure on shorter term call volatility for Cisco options.
Shares of Cisco had recovered somewhat by the close of trading but still finished down 1.2 percent on the day.
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