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Although Cisco Systems, Inc. (NASDAQ:CSCO) has been stagnant on the charts, many speculators continue to bet on a breakout (or a breakdown). In the last 10 trading days alone, more than 27,000 new puts have been bought to open on the networking name, according to data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), versus nearly 36,000 calls. Today, call volume and put volume are neck and neck, with put volume outpacing its normal level by close to 60%, while call volume is relatively on par with what's typically seen.
On the put side, two LEAPS strikes are particularly active, thanks to one large trade that hit the tape during the lunch hour. A block of 6,000 January 2015 15-strike puts traded off the bid price of $1.13, while a block of 4,000 January 2015 20-strike puts changed hands near the ask price at $3.17 at the same time.
This may be a 3-by-2 ratio put spread, which will reach its maximum profit at expiration if CSCO is trading right at $15. Above the 20 level, losses are limited to the net debit paid of $2.95 per spread (selling three contracts for $1.13 each and buying two contracts for $3.17 each). If CSCO falls, however, losses are unlimited down to zero due to the uncovered sold puts. In other words, these ratio put spread buyers are hoping CSCO falls up to 26% from its current perch of $20.32 by January 2015 options expiration.
On the call side of things, the July 23 strike is in play. Nearly all of the nearly 5,300 contracts have traded at or above the ask price and implied volatility is modestly higher, signifying buy-to-open activity. This call's breakeven price at expiration -- given the volume-weighted average price (VWAP) of $0.13 -- is $23.13 (strike plus VWAP), or almost 14% north of current levels. In fact, this is territory Cisco Systems, Inc. (NASDAQ:CSCO) has not explored since late 2010.
Cisco has advanced just 5% in the past 52 weeks, and is up just under 3.5% in 2013. This month, the shares have consolidated into their 20-week moving average, which failed to provide support. Both of today's large-scale options traders are hoping for an end to this inertia, however, but are counting on wholly different results.