Schaeffer's Options Center

Cisco Systems (CSCO: sentiment, chart, options) announced this morning that it plans to invest $275 million in Turkey over five years. The firm plans to create a technology innovation center that will provide a laboratory platform for testing new technologies for the Turkish market. The stock is trading almost one percent lower this morning as it continues to consolidate into support at its ascending 10-day moving average. The equity has been guided higher by its 10-day and 20-day trendlines since the stock gapped higher on August 9.

From a sentiment standpoint, options players are growing more skeptical of the stock's strength. The equity's Schaeffer's put/call open interest ratio has risen to an annual high of 0.69. This increase indicates that speculators have added puts at a faster pace than calls among near-term options.

A daily feature available on SchaeffersResearch.com is "Options Update." Every day, we'll give a brief market overview and focus on one stock that is the center of some heavy option trading. The focus of today's feature is General Electric.

According to the Conference Board, consumer confidence dropped to 99.6 in August from July's revised reading of 107.0. This month's drop is the largest since Hurricane Katrina hit the Gulf Coast. In addition, the index is at its lowest level since last November, which was when the Gulf Coast was recovering from the spate of hurricanes. Economists had expected a drop to 102.7 for the month; July's initial estimate was 106.5.

The disappointing data has taken a bit of the luster off the fact that crude futures have dropped to a five-month low. At last check, a barrel of black gold was going for $69.76, 86 cents lower on the day. The last time crude traded below $70 per barrel was April. On Monday, crude futures dropped to a two-month-plus low as the National Weather Service forecast that Tropical Storm Ernesto would miss the Gulf of Mexico, sparing the various oil operations inhabiting the Gulf.

Finally, keep an eye and an ear out for two major announcements. At 2:00 P.M. Eastern time, the Federal Open Market Committee is set to release the minutes from its latest meeting. Rest assured that these notes will be scrutinized for some hint at what the Fed's next move will be. The last meeting saw the Fed put an end to its current cycle of rate hikes, and the minutes may shed some light on the central bank's feelings about the economy. While most investors will focus on the Fed's announcement, let's not discount the potential impact of a press conference to be held by Iranian president Mahmoud Ahmadinejad to respond to the U.N.'s demands and deadline.

Most-Active Options Update

At 1:23 p.m. Eastern Time, the Dow Jones Industrial Average (DJIA – 11,316.6) has dropped 0.31 percent. The S&P 500 Index (SPX – 1,297.23) is 0.35 percent lower, and the Nasdaq Composite (COMP – 2,150.2) has dropped 0.49 percent. At 1:25 p.m. Eastern Time, 1,670,771 calls have changed hands compared to 1,291,704 puts, equaling a single-day put/call volume ratio of 0.77. The CBOE's equity put/call volume ratio stands at 0.74, while the ISE's ratio comes in at 0.81.

Option Activity Follow-Up

Yesterday, I took a look at Wal-Mart Stores (WMT: sentiment, chart, options) and the heavy addition of short-term call positions. In the observation, I pointed out that the 45 level (a level's support that Mr. Schaeffer called tenuous earlier this month, and the stock has since breached) could now act as resistance as both prior support and the site of peak call open interest. A quick glance at today's price action for the retailing behemoth shows that it has nearly wiped out yesterday's gain after meeting resistance slightly short of the 45 level.

General Electric

This morning, General Electric's (GE: sentiment, chart, options) GE Money consumer finance unit announced that it agreed to buy 25.4 percent of Bank of Ayudhya, Thailand for $600 million. The purchased bank is the sixth largest bank in Thailand, with 500 branches, four million deposit accounts, and 50,000 commercial accounts. In today's trading, GE is up slightly, adding 0.27 percent to trade slightly above $34. The conglomerate finds itself on our notably active calls list thanks to heavy activity on its September 35 call (GEIG). Open interest on this contract checks in above the 96,000 level, far and away the peak open interest for September.

The 35 level is crucial when it comes to GE, as it is the site of peak call open interest in the front three-month option series. This accumulation of bearish bets could turn away any attempts the shares make to move higher. Of course, the 35 level may be able to do just that on its own. The chart below shows that the stock has shied away from this level various times since January 2004. Furthermore (and finally), the stock is battling its 10-month and 20-month moving averages. This gruesome twosome has provided resistance throughout the past eight months.

I actually find it a bit more dramatic to take a look at a daily chart of GE's performance since the beginning of 2006. I will save you the counting and the nasty math by telling you that the shares have finished 10 days above the 35 level. A glance at my handy-dandy Schaeffer's desk calendar shows me that today is the 241st of the year. The wonders of division and subtraction show me that this data means that 96 percent of 2006 has seen GE close below the 35 level.

A final note on the 35 level. It is also the site of peak call open interest in the January 2007 and March 2007 series. We may see this level act as resistance for quite some time.

GE is a member of the Dow Jones Industrial Average (DJIA), and although it has underperformed the broader Dow on a monthly relative-strength basis since September 2000, it still receives the requisite "blue-chip love."

Did I mention "blue-chip love?" Check out the sentiment backdrop for GE:

• Percent of analysts tracked by Zacks who rate the stock with a "buy": 93%
• Number of analysts tracked by Zacks: 15
• Short interest as a percent of float: 0.36%
• Short-interest ratio: 1.62
• Schaeffer's put/call open interest ratio (SOIR): 0.68
• SOIR percent rank: 24%
• Schaeffer's Equity Scorecard: 3.0

Well, I would have to say that sentiment is decidedly bullish. In fact, if I could put the percentage of "buy" or better ratings in flashing numbers, I would. Of the 15 analysts covering GE 14 rate it a "buy" or better. Of that 14, 11 deem GE worthy of a "strong buy," leaving no room for upgrades. This configuration leaves more than enough room for downgrades to push the shares lower.

Of course, if downgrades exert downside pressure, there is plenty of short-covering support to buoy GE, right? Wrong. Less than half a percent of the firm's float is sold short, and it would take roughly two days to cover these shorted shares. Moreover, GE's Schaeffer's put/call open interest ratio of 0.68 is lower than 76 percent of the past year's worth of readings. This reading reflects near-extreme bullish sentiment toward GE. If some of these bulls jump ship, it could result in selling pressure, which could push the shares lower still.

Face it, GE is a struggling stock, but it receives the love reserved for blue chip stocks. This combination results in a Schaeffer's Equity Scorecard reading of 3.0 out of a possible 10. A score of this ilk suggests that the GE bulls out there may be waiting a while.

** The tables below reference notably active call and put contracts across all six exchanges.**