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Cisco Systems, Inc. (NASDAQ:CSCO) Option Bear Predicts Long-Term Slump

Is the speculator protecting his CSCO shares?

by 10/11/2013 11:12 AM
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Cisco Systems, Inc. (NASDAQ:CSCO) is up 0.9% at $23.21, bringing its year-to-date gain to 18.2%. One option trader, however, is betting on CSCO to slump over the long term, and is picking up LEAPS to gamble on a slow, steady slide for the shares.

So far today, CSCO has seen roughly 8,100 puts change hands, representing a mark-up of 8% to the stock's typical intraday volume. More than a third of the action has transpired at the January 2015 22-strike put, where a block of 3,000 contracts crossed the tape at the ask price of $2.42, suggesting they were bought. Plus, implied volatility is creeping higher, at last check, hinting at new positions.

By purchasing the puts to open, the buyer will begin to profit if CSCO breaches $19.58 (strike price minus premium paid) by January 2015 options expiration. In other words, the speculator expects CSCO to retreat 15.6% in the next year-plus. Risk, meanwhile, is limited to the initial premium paid for the puts, should CSCO remain north of $22 through the options' lifetime.

Considering CSCO's longer-term advance -- the equity has added more than 26% over the past year -- it's possible the out-of-the-money LEAPS were bought as long-term portfolio protection. By buying the puts, the trader insures the least he receive for his CSCO shares is $22 apiece (the strike), should the stock violate this level in the next 15 months. His primary goal, however, remains for Cisco Systems, Inc. (NASDAQ:CSCO) to resume its ascent.

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