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If there's one name this week which holds the promise of finding investors either uniformly celebrating or "sell-e-brating", it's likely Cisco (CSCO). The NASDAQ 100 component and world's largest network communications concern is reporting after the close Wednesday evening. Analysts expect the company to report profits of $0.31 per share.

The consensus view is down about 25% from the year ago period's levels. More important, traders will be keen to hear management's outlook going forward. Typically, Cisco's market / business heft can yield strong clues regarding overall IT business spending.

However, overall investor reaction to Cisco's report might be a bit more subdued this time out. According to Barron's The Striking Price, analysts at Goldman wouldn't be surprised to see a more positive outlook for 2010. But slighter end customer demand for enterprise networking equipment versus other tech hardware, should put a lid on shares near-term.

"You've come a long way baby." Taking a look at the weekly price chart shown below in Figure 1 and this strategist agrees with Goldie about limited upside. Technically, shares of CSCO have completed a Fib-based two-step (AB = CD) pattern. Looking at potential Fibonacci, trend and gap support for a spot where profit-taking or outright disappointment would find likely support, the $20.50 - $20.60 and roughly 10% below Tuesday's close, looks interesting.

Figure 1: Cisco (CSCO) Weekly Two Step Complete

Analysts at Goldman go on to suggest selling the Nov 23 put / 25 call strangle based on what they anticipate to be a tempered reaction to Cisco's report, as well as front month implieds at a fairly decent premium to actual historical or statistical volatility. Shown below is a visualization of that interpretation using a comparison of front month implieds relative to both short and longer-term movements in the stock.

Figure 2: Cisco (CSCO) 7-30 Day IV / SV

Compared to the short-term 10-Day SV and 100 reading, November implieds are priced theoretically rich by about 50%. The 6 and 20 day comps also suggest a pricey situation with levels overvalued by about 25% to 70%. As much and seeing in the same chart how pre-report and bid situations in CSCO options do translate into a typical volatility crush, a drop of 30% to 40% and closer but still above statistical volatility is anticipated.

On the other hand or of a different mind, this strategist doesn't think selling the strangle is the best candidate for Cisco. What's been left out thus far are the actual historical levels of statistical volatility in shares, as well as implieds. Both look quite similar on the two year chart, so I've taken the liberty of pulling up the SV view in Figure 3.

Figure 3: Cisco (CSCO) Statistical Volatility

Easily visible on the Cisco SV chart of the past two years is how far volatility has pulled back in and is now just off its lows. That's not unique of course, as more names than not find themselves in similar "Monbacky!" situations. As well, volatility can keep trending lower, at least up to a certain point and as past incidents of single digits in the VIX are a fleeting reminder.

Despite what's just been said however and without making any "recs or wrecks", I don't see the short strangle as optimistically as Mr. Market does. Instead and with the likes of heavyweight peers Amazon (AMZN), Microsoft (MSFT), First Solar (FSLR) and Baidu.com (BIDU) all having overcompensated for option bids in front of their reports, I'm giving some weight to another trend that's ultimately enjoyed a good run in the real world.

Chris Tyler
Senior Staff Writer & Options Strategist
Optionetics.com ~ Your Options Education Site
Visit Chris Tyler's Forum

The information offered here is based upon Christopher Tyler's observations and strictly intended for educational purposes only, the use of which is the responsibility of the individual.

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