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Cisco Systems, Inc. (CSCO) Targeted for Volatility Play

Breaking down a long strangle on Cisco Systems, Inc.

by 4/15/2014 9:55 AM
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Option Brief: Cisco Systems, Inc. (NASDAQ:CSCO) bounced back along with the broader equities market yesterday, advancing 1.7% to settle at $22.85. From a longer-term perspective, the shares have spent April dawdling between support near $22.50 and resistance at $23.20, but one options trader is betting on a breakout -- in one direction or another -- within the next six months.

While short-term options were in demand yesterday -- the security's 30-day at-the-money implied volatility jumped 11.3% to 24% -- it was the October series that saw the most action. Specifically, symmetrical blocks of 6,000 contracts traded at the October 22 put and October 23 call. Both blocks crossed on the ask side -- the puts for $1.21, the calls for $1.20 -- and open interest soared at both strikes overnight, pointing to the initiation of a long strangle.

As alluded to earlier, by buying both calls and puts on CSCO, the trader is hoping for a major move in either direction. Since the strangle was purchased for $2.41 per pair of contracts, the buyer will profit if the shares are sitting lower than $19.59 (put strike minus net debit) or higher than $25.41 (call strike plus net debit) when October-dated options expire. Risk, meanwhile, is limited to the initial premium paid for the strangle. Cisco Systems, Inc. (NASDAQ:CSCO) -- last seen 0.5% higher at $22.97 -- hasn't been south of the lower breakeven rail since December 2012, and hasn't been north of the upper breakeven rail since August 2013.


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