Cisco Volatility Sinks Into the Sunset….

Fed Chairman Alan
Greenspan will be in Chicago tomorrow, speaking at the Chicago Fed’s annual
banking conference. Traders here on the floor, normally not an extremely
optimistic lot, seem to be betting that the Fed will cut short-term interest
rates 50 basis points at next week’s (May 15th) Federal Open Market
Committee meeting. Traders are apparently not alone in that estimation, as
according to a BridgeNews poll of economists, 83% think the Fed will
slash rates half a percentage point next week. 

   

As fellow www.TradingMarkets.com
commentator and weekly guest on “Doctor J &
the Traders”
(www.webfn.com,
Thursdays at 4:30 CT) Goran Yordanoff and I discussed last night, we seem to
have exhausted the sellers. It could be that bears simply don’t want to leave
their necks hanging out there, with further rate cuts looming. Whatever the
reason, we seem to recover quickly from sell offs that one month ago would have
hammered the markets. 

    

As for our old friend Cisco Systems
(
CSCO |
Quote |
Chart |
News |
PowerRating)
,
the news was, as we anticipated, not anything that could lift the stock for the
short term. What new options traders may want to note is the effect of
volatility contraction after last night’s earnings report. 

Symbol

Call

Volume

Put

Volume

$W

Call Vol

$W

Put Vol

CSCO

83,471

50,784

144,301

73,103

As you know, volatility
(measurement of perceived risk) is usually highest ahead of events with unknown
outcomes. These events include earnings, new product introductions, class action
settlements etc. In any case, last night CSCO’s earnings announcement didn’t
cause the stock movement to exceed the heightened volatility, so today the
volatility is getting crushed. 

    

I have highlighted the net movement of the CSCO May calls and puts to show the
effect of this premium contraction. Please note the May 15 calls are trading
down $1.30, considerably more than the underlying stock’s $5/8 point loss.
Likewise, the 17 ½ calls are down $.85, despite the fact that the stock is only
down $5/8. The same story is true for the puts, as the puts are trading down
even though you would expect the put to increase in value as the stock
drops. 

Calls

Net

Bid

Ask

Puts

Net

Bid

Ask

15-May

-1.3

4.6

4.9

15-May

-0.05

0.05

0.1

May
17 1/2


-0.85

2.35

2.65

May
17 1/2


-0.2

0.25

0.35

Over at the NDX pit, our
traders and computers noted big put trading between the MAY 1900 puts and the
JUNE 1800 puts. Roughly 1600 of each traded. The MAY 1900’s for about $61 and
the JUNE 1800’s for $88. All that action really spiked the dollar weighted put
/ call for this institutional product (due to the size of the contract,
institutions play here, retail trades the MNX or QQQ). 

Symbol

Call

Volume

Put

Volume

$W

Call Vol

$W

Put Vol

NDX

568

4,610

36,465

339,342

(1010WallStreet.com
has licensed the use of Hamzei Analytics proprietary options analytics)