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Ciena Sees a Spike in Front-Month Call Volume

Meanwhile, one investor constructs a collar on CIEN

by 3/2/2012 11:40 AM
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Bullish speculators swarmed Ciena Corporation (CIEN - 14.69) yesterday, as roughly 7,800 calls changed hands, more than doubling the equity's average daily volume. Most active proved to be the out-of-the-money March 16 strike, where 3,566 calls were traded -- the majority of them at the ask price, pointing to buyer-driven activity. This strike saw an overnight rise in open interest of 2,391 contracts, indicating that a large portion of the volume consisted of new positions. This option now carries open interest of 6,860 contracts. By purchasing these calls to open, investors are betting on the stock to muscle north of $16 by the time front-month options expire.

Upon closer inspection of the data, it appears that a block of 209 puts was bought at the March 13 strike, while an equal number of calls were simultaneously sold at the March 15 strike. This implies that one trader has constructed a collar on CIEN. In this strategy, he has offset the cost of the protective puts with the premium received from the covered calls. Since the investor is primarily a shareholder, his main goal is for the stock to climb higher, but he may be wary of a potential short-term dip. He has locked in a minimum price of $13 per share, should the stock retreat, but he'll risk having his shares called away if CIEN should rise above $15 prior to expiration.

From a broader sentiment scope, Thursday's surge in call volume is more of the same for CIEN. The 10-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) call/put volume ratio stands at 5.15, confirming that calls bought to open have outnumbered puts by more than five to one during the past two weeks. This ratio ranks in the 88th annual percentile, signaling that speculators have been snatching up calls over puts at a faster-than-usual pace.

Meanwhile, although short interest on CIEN fell by 10% during the past month, these bearish plays still account for a hefty 27.15% of the equity's float, suggesting that some of the recent call volume could be the work of short sellers looking to hedge their bets. Either way, it would take more than a week to buy back these shorted shares, at the stock's average pace of trading.

Technically, CIEN has added nearly 22% so far this year, and has bested the broader S&P 500 Index (SPX) by more than 14% during the past 60 days. On the charts, however, the stock is hovering just beneath its 10-week moving average, a trendline it has not breached, on a weekly closing basis, since late December.

It should also be noted that CIEN is slated to reveal its fourth-quarter earnings on March 7, and has surpassed analysts' bottom-line estimates in just two of the past four quarters. At last check, the equity is down about 1.2% to hover at $14.69.


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