The options market offers a glimpse on the volatility investors might expect for the underlying company. In the technology sector, 3 notable companies experienced a large increase in options volatility. These shifts could mean big gains – or losses – for investors holding their shares.
In the table below, implied volatility ranged from 37.8% to 60.1%:
| Contract | % Change Volatility | %Chg Volatility | Implied Volatility | Price ($) | % Change | Volume |
|---|---|---|---|---|---|---|
| CREE INC | CREE US 04/20/13 C49 | 13.4 | 40 | 1.6 | -64.4 | 514 |
| CREE INC | CREE US 04/20/13 C50 | 13.3 | 39.9 | 1.22 | -60 | 1420 |
| CISCO SYSTE | CSCO US 01/17/15 C10 | 21.3 | 60.1 | 11.2 | 3.7 | 6600 |
| CISCO SYSTE | CSCO US 01/17/15 C13 | -26.1 | 37.8 | 8.2 | 5.1 | 6200 |
| NETFLIX INC | NFLX US 04/20/13 C170 | 11.1 | 51.2 | 6.95 | -34.4 | 2076 |
| NETFLIX INC | NFLX US 04/20/13 C175 | 10.7 | 50.1 | 4.9 | -36 | 2709 |
| NETFLIX INC | NFLX US 04/20/13 P170 | 10.3 | 50.6 | 7.5 | 80.7 | 3507 |
| NETFLIX INC | NFLX US 04/20/13 P165 | 10.1 | 51.4 | 5.72 | 127.9 | 2948 |
Data Source: Bloomberg.com
Despite returning just 3.3% in the 1 year period, options for Cisco Systems, Inc. (NASDAQ:CSCO) expiring in 2015 saw an increase in volatility. Investors should anticipate that Netflix, Inc. (NASDAQ:NFLX) and Cree, Inc. (NASDAQ:CREE), which are up substantially, to make big moves soon:
An analysis is needed for each company to determine which direction these companies are likely to move next.
1) Cree, Inc. (NASDAQ:CREE)
Cree shares dropped after an analyst at Jefferies was skeptical that the company was fairly valued. Jefferies ranked the company an “underperform” and forecast fiscal 2014 earnings will be $1.65 per share. The consensus forecast is $1.78 per share.
Cree is a solidly run company that aligned its verticals. This means that the company produces LED product and sells it to consumers through its sales channels. Cree acquired Rudd and BetaLED to make manufacturing more easily accessible at the consumer level. Cree is slowly introducing its product at The Home Depot, Inc. (NYSE:HD).
2) Cisco Systems, Inc. (NASDAQ:CSCO)
Cisco Systems, Inc. (NASDAQ:CSCO) shares traded around 5% below a yearly peak reached in early March. The networking giant increased its dividend rate by 21% to $0.17 per share. Cisco Systems, Inc. (NASDAQ:CSCO) has plenty of cash on hand, so investors could expect dividends to keep increasing.
In the middle of March, FBR Capital ranked Cisco Systems, Inc. (NASDAQ:CSCO) shares a “sell,” citing weaknesses in the router and switching market. If anything, the warning from F5 Networks on April 5 could suggest weakness ahead in the networking market.
3) Netflix, Inc. (NASDAQ:NFLX)
The 50% volatility in Netflix, Inc. (NASDAQ:NFLX) options was evident for both bearish and bullish options. Investors are nervous that further losses will continue, after shares dropped 10.6% in just one week. The decline was also accompanied with rising volume, a bearish sign. Netflix, Inc. (NASDAQ:NFLX) continues to be making all the right moves. House of Cards was highly-rated by critics, and Arrested Development will be released at the end of next month. To stay ahead of the game, House of Cards was filmed in 4K. If 4K is embraced through streaming (though not anytime soon – a Sony 4K television costs $25,000), Netflix, Inc. (NASDAQ:NFLX) will be ahead of broadcasters. This would give Netflix, Inc. (NASDAQ:NFLX) a competitive advantage over traditional distributors.
Conclusion
Cisco Systems is the least likely company to experience large swings in the short-term. The company is improving its dividend yield steadily, and now yields 3.31%. A sell-off in Cisco would give income investors an opportunity to build a bigger position. When F5 sold-off, the decline in Cisco was minimal.
