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Most Active Options Update: Cisco Systems, Inc. (CSCO)

Cisco Systems, Inc. option traders prepare for Wednesday night's earnings results

by 2/10/2014 1:48 PM
Stocks quoted in this article:

The 20 stocks listed in the table below have attracted the highest total options volume during the past 10 trading days. Names highlighted are new to the list since the last time the study was run, and data is courtesy of Schaeffer's Senior Quantitative Analyst Rocky White. One name of notable interest this afternoon is Cisco Systems, Inc. (NASDAQ:CSCO).


As Cisco Systems, Inc. prepares to take its turn in the earnings confessional after Wednesday's close, option players in today's session are betting on a well-received, or at least muted, reaction from Wall Street. While overall option activity this afternoon is running at a 43% mark-up to typical intraday levels, the number of contracts that have changed hands on both the put and the call side are roughly equivalent -- at around 42,000 apiece.

The most active strike belongs on the put side; specifically, CSCO's February 22 put has seen 9,832 contracts change hands. However, the majority of these have gone off on the bid side, and implied volatility (IV) has ticked 1.5 percentage points higher, pointing to sell-to-open activity. With CSCO trading at $22.83, these put writers expect the stock to stay north of $22 through next Friday's close. This will allow the puts to expire worthless, and the traders to retain the initial net credit as their full potential reward.

Now appears to be an opportune time to sell premium on CSCO, thanks to rising demand for its short-term options ahead of earnings. In fact, since the turn of the calendar year, the equity's Schaeffer's Volatility Index (SVI) has jumped to 42% from 18%, and is currently ranked in the 73rd percentile of its annual range. Simply stated, premium on CSCO's front-month options is expensive at the moment, from a volatility perspective.

Meanwhile, on the other side of the options aisle, the stock's weekly 2/14 24.50-strike call has garnered notable attention. Of the 3,709 contracts traded, 92% have done so on the ask side, hinting at buyer-driven activity. Additionally, IV has jumped 13.6 percentage points, indicating the initiation of new positions. Should the security fail to move north of $24.50 by Friday's close, the most the speculators have risked is the initial premium paid. According to Trade-Alert, the volume-weighted average price for the calls is $0.14.

Fundamentally, Cisco Systems, Inc. (NASDAQ:CSCO) has a solid history on the earnings stage, and has bested analysts' bottom-line estimates in each of the past seven quarters. However, the stock has followed up the results with some drastic swings on both sides of breakeven, including a 12.6% single-session gain last May, and an 11% day-after drop last November. On average, though, the equity has shed 0.3% and 0.5% in the subsequent day and week, respectively. For CSCO's fiscal second quarter, Wall Street is calling for a profit of 46 cents per share -- five cents less than its year-ago results.


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