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Cisco Systems, Inc. (CSCO) Sees a Burst of Near-Term Options Activity

CSCO draws both bulls and bears, despite downbeat brokerage note

by 3/21/2013 10:52 AM
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Options players from both sides of the trading aisle are flocking to Cisco Systems, Inc. (NASDAQ:CSCO - 20.94) today, despite the stock falling 3.4% after some negative analyst attention. Specifically, FBR Capital downgraded CSCO to "underperform" from "market perform," and lowered its price target to $17 from $22. Nevertheless, roughly 24,000 calls have crossed the tape so far, more than doubling the equity's expected intraday call volume. Meanwhile, approximately 28,000 puts have changed hands, which is quadruple the norm.

On the bullish end of the spectrum, speculators have zeroed in on the April 21 call, where nearly 3,300 contracts have traded at a volume-weighted average price (VWAP) of $0.39. The majority of them were exchanged at the ask price, and implied volatility was last seen 3.4 percentage points higher -- hinting at buy-to-open activity. If these calls were, in fact, bought to open, traders are hoping CSCO will rise north of breakeven at $21.39 (strike price plus the VWAP) by front-month expiration.

On the bearish side of the options fence, the weekly 3/22 20.50-strike put has received considerable attention, with 1,429 contracts exchanged -- 94% of them at the ask price, suggesting they were purchased. More specifically, these puts crossed at a VWAP of just $0.01. Since today's volume exceeds current open interest levels, it's likely that new positions are being added here. In this scenario, speculators are betting on the stock to fall below $20.49 (strike price less the VWAP) by the time the closing bell rings this Friday, when these weekly options expire.

From a wider sentiment scope, calls seem to be the options of choice on Cisco Systems. In fact, the security's 20-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) call/put volume ratio checks in at 2.01. In other words, calls bought to open have doubled puts during the course of the past four weeks.

Exploring the firm's technical backdrop, CSCO has gained about 6.6% year-to-date. However, today's drop has put the stock in danger of finishing the week below its 10-week moving average for the first time mid-November. Still, no matter which way the shares head over the next 24 hours (or couple of weeks), the most today's options buyers risk losing is the initial premium paid.


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