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Cisco Systems Option Traders Buck the Bullish Trend

CSCO's December 19.50 put was the most active strike on Friday

by 12/17/2012 10:01 AM
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Given Cisco Systems, Inc.'s (NASDAQ:CSCO - 19.86) 19% pop off its Nov. 9 low of $16.68, option players have tended toward the bullish side of the aisle in recent weeks. During the course of the past 10 sessions, traders at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) have bought to open 333 calls for every 100 puts. This call/put volume ratio of 3.33 ranks higher than 63% of other such readings taken over the last 52 weeks, pointing to a bullishly skewed bias in the options pits.

This trend is echoed in the stock's Schaeffer's put/call open interest ratio (SOIR) of 0.55. Not only does this show that call open interest nearly doubles put open interest among options expiring in three months' time, but it ranks in the 27th percentile of its annual range. In other words, short-term speculators are more call-heavy than usual toward CSCO.

In Friday's session, though, it was a put -- not a call -- that emerged as the most popular strike on the day. Nearly 6,100 contracts changed hands at CSCO's December 19.50 put, the majority of which traded at the ask price. Implied volatility ticked higher and open interest added more than 5,600 contracts over the weekend, making it safe to assume new positions were initiated.

With traders ponying up a volume-weighted average price (VWAP) of $0.09 per contract, CSCO needs to fall below breakeven at $19.41 (the strike minus the VWAP) by Friday's close in order for these puts to be profitable. This is a 2.3% drop from current levels.

As touched upon, CSCO has been in a solid uptrend since hitting its most recent low. This positive price action has been highlighted by the stock's 10-day moving average, which has ushered the equity up the charts since mid-November.

In light of this recent run higher, the preference for near-the-money puts on Friday may simply represent shareholders protecting their profits against a potential pullback. With CSCO's Relative Strength Index (RSI) of 72 sitting solidly in overbought territory, a near-term dip isn't necessarily out of the question.


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