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Cisco Systems Bulls Predict Further Gains by Friday

Bullish brokerage note attracts front-month bulls to CSCO

by 1/15/2013 10:24 AM
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Shares of Cisco Systems, Inc. (NASDAQ:CSCO - 20.84) ticked 2.4% higher yesterday, thanks to some positive analyst attention. The upbeat brokerage note also appears to have sparked an uptick in bullish options activity, as roughly 114,000 calls were exchanged during the course of the session. This was more than double the equity's average single-session call volume, and over three times the number of puts traded.

Snagging the lion's share of the action on Monday was the January 2013 21-strike call, where nearly 25,500 contracts crossed the tape -- 70% of them at the ask price, suggesting they were bought. More specifically, these calls changed hands at a volume-weighted average price (VWAP) of $0.11. Meanwhile, open interest at this strike surged by 6,600 contracts overnight, signaling the initiation of new positions. By purchasing these calls to open, traders are betting on CSCO to rise north of $21.11 (strike price plus the VWAP) by this Friday's close, which is when front-month options expire. This breakeven rail is just a stone's throw away from yesterday's closing price of $20.97.

This preference for calls over puts is business as usual for CSCO. In fact, the security's 10-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX (PHLX) call/put volume ratio checks in at 3.82, indicating calls bought to open have almost quadrupled puts during the last couple of weeks. This ratio ranks higher than 74% of comparable readings collected within the past year, meaning speculators have been scooping up bullish options over bearish at an accelerated clip.

From a technical perspective, the tech concern is off to a promising start in 2013, climbing about 6% year-to-date. The stock has also outpaced the broader S&P 500 Index (SPX) by about 10 percentage points during the past three months. What's more, CSCO is trading atop its 40-month moving average, a trendline not surmounted on a monthly closing basis since April 2012.


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