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Cisco Systems, Inc. (NASDAQ:CSCO - 19.83) is following in the bearish footsteps of the broad markets today, and was last seen roughly 2% lower. A group of today's option players are betting on the Dow component to continue to struggle over the next week. Of the roughly 38,000 call contracts that have crossed the tape today, around 2,600 have traded at CSCO's 12/28 20 strike. Nearly all of these have gone off at the bid price, and just 49 contracts currently make up open interest here -- suggesting these positions are being sold to open.
By selling these short calls, traders expect CSCO to remain below the $20 mark through next Friday, when these weekly options expire. In this best-case scenario, the calls will expire worthless, and the speculators can pocket the maximum potential profit of $0.17 per contract, which Trade-Alert indicated was the volume-weighted average price (VWAP).
However, this could also be part of a covered-call strategy, in which shareholders will be required to deliver the stock at $20 per share, should CSCO move above the strike price throughout the next week. If the equity remains below this mark, the investors have added some cushion to their rate of return. But, considering the calls are so close to the money, this strategy is relatively risky for anyone hoping to retain their CSCO shares.
From a wider perspective, option traders have been using calls in the traditional sense during the last month. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), speculators have bought to open 303 calls for every 100 puts throughout the past 20 sessions.
For a stock that's up 19% off its most recent low of $16.68 -- tagged on Nov. 9 -- this inclination toward bullish bets is understandable. This bout of positive price action has been highlighted by the stock's 10-day moving average, which has provided CSCO with a lift since mid-November. However, to the delight of the aforementioned call sellers, today's pullback has the equity at risk of closing south of this trendline for the first time since Nov. 13.
Today's call sellers could be reaping the rewards of this dreary price action come next Friday, should CSCO continue to wallow in the red in the near term.