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Option Brief: Cisco Systems, Inc. (NASDAQ:CSCO) was a blue-chip rock star yesterday, as its 3.6% charge higher led the Dow, and lifted the shares to close atop their upper Bollinger Band for the first time in 2014. What's more, optimism about the company's foray into the cloud computing world was also felt in the options arena, as CSCO calls traded at three times the normal daily rate, with roughly 128,000 contracts exchanged. For comparison, just 27,000 CSCO puts changed hands.
After hitting a 52-week low in early trading, CSCO's 30-day at-the-money implied volatility edged 5.2% higher to land at 17.2% by the close, reflecting escalating demand for short-term contracts. Most active was the weekly 4/4 22.50-strike call, where more than 33,000 contracts crossed the tape. Eighty-nine percent of the calls traded on the ask side, suggesting they were bought, and open interest skyrocketed by more than 28,900 contracts overnight. Plus, the International Securities Exchange (ISE) confirms that at least a portion of the volume was of the buy-to-open variety.
By purchasing the calls at a volume-weighted average price (VWAP) of $0.14, the buyers expect CSCO to extend its uptrend through the close next Friday, April 4, when the options expire. Specifically, the calls will be profitable if CSCO is sitting atop $22.64 (strike plus VWAP) -- just a stone's throw from the stock's current perch at $22.57 --at expiration.
In the wake of Cisco Systems, Inc.'s (NASDAQ:CSCO) advance, delta on the calls spiked to 0.40 from 0.07, implying a roughly 40% chance of the contracts expiring in the money. Risk, meanwhile, is limited to the initial premium paid for the calls, should the security fail to topple the strike.