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Longer-Term Bulls Set the Bar High For Cisco Systems

Ambitious call players zero in on CSCO's July 27 strike

by 12/10/2012 2:09 PM
Stocks quoted in this article:

Shares of Cisco Systems, Inc. (NASDAQ:CSCO - 19.72) are up more than 2% this afternoon, after the stock scored a price-target hike to $24 from $23 at S&P Capital IQ earlier in the session. The upbeat analyst attention may be attracting bulls to the options pits, as roughly 89,000 calls have crossed the tape so far -- a 57% increase over the equity's expected intraday volume. By contrast, just 26,000 puts have been exchanged.

One of the more popular options has been the July 27 call, which has seen more than 3,500 contracts change hands at an average price of $0.07. All of these calls traded at the ask price, pointing to buyer-fueled activity. This option currently holds open interest of just three contracts, while implied volatility was last seen 1.4 percentage points higher -- both of which hint at the initiation of new positions. By purchasing these far-out-of-the-money calls to open, speculators are betting on the stock to surpass the breakeven rail of $27.07 (strike price plus the average premium paid) by July expiration.

The security is certainly no stranger to bullish speculation. In fact, data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) shows a 10-day call/put volume ratio of 4.15 for CSCO, indicating calls bought to open have more than quadrupled puts during the last couple of weeks. This ratio ranks higher than 79% of comparable readings taken within the past year, signaling traders have been scooping up calls over puts at an accelerated clip.

As a result, CSCO's Schaeffer's put/call open interest ratio (SOIR) checks in at 0.56, with calls nearly doubling their bearish counterparts among options scheduled to expire over the next three months. This ratio arrives in the 28th percentile of its annual range, confirming near-term traders have been more call-heavy toward the stock just over one-fourth of the time during the past 12 months.

It should be noted, however, that short interest on the tech concern surged by about 30% during the last two reporting periods, which suggests that some of the recent buy-to-open call volume could be attributable to short sellers looking to hedge their pessimistic bets. Still, CSCO's bearish camp is far from crowded, as these shorted shares make up less than 2% of the equity's available float.

Meanwhile, sentiment toward CSCO among the brokerage crowd is bullishly slanted. The security sports 17 "strong buys" and two "buy" recommendations, versus 12 "holds," and zero "sell" ratings. This bounty of optimism isn't surprising, as the shares have climbed more than 9% year-to-date, while also outperforming the broader S&P 500 Index (SPX) by about 12 percentage points during the past month.

Taking a closer look at the charts, CSCO has been trending higher since Nov. 14 -- the site of an earnings-induced bullish gap -- supported by its 10-day moving average. As previously noted, however, today's July bulls need the stock to venture at least 37.3% north of its current perch by July 19 -- a move that would put CSCO in territory not charted since May 2010.


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