Options Update: Are Cisco Systems Put Traders Calling for a Bottom?

Technology stocks have come under heavy fire in recent weeks, with the Select Sector Technology SPDR plunging nearly 20% since late September.

Networking bellwether Cisco Systems
Quote |
Chart |
News |
has paced this decline, dropping more than 21% during the same time frame. Analysts have added to the negativity surrounding CSCO, as Barclay’s Capital cut its price target on the shares to $23 per share from $27 per share yesterday.

Options traders are piling onto the downtrodden security, as more than 24,000 puts have traded on CSCO so far, more than tripling the stock’s average daily put volume and placing the shares on our Intraday Volume Explosion List. The vast majority of this volume has changed hands at CSCO’s October 18 put, but it was the wealth of bid activity that caught my eye today.

Cisco Systems option volume details

Anatomy of a Cisco Systems Put Position

Looking at the chart above, you can see that most of today’s October 18 put activity on CSCO has traded at the bid price. This preference for trading options at the bid price could indicate that we are seeing sell-to-open put volume on the shares, and this assumption is supported by the fact that today’s volume at the October 18 put has outstripped open interest at this front-month option. While there is a chance that these contracts could have been sold to close an existing purchased put position, let’s assume that we are dealing with a put-sell position just for the sake of argument.

At 10:56 a.m. Eastern time, a trio of blocks totaling 964 contracts traded on the same exchange (suggesting that they were part of a larger position) at the bid price of $0.63. We’ll use this grouping as today’s example. Running with this put-selling theme, let’s examine how the trade actually plays out. The hypothetical trader sold 964 CSCO October 18 puts for $0.63, or a total credit of $60,732 — ($0.63 * 100)*964 = $60,732.

Remember, in a put sell position, all a trader needs is for the underlying stock to remain above the sold strike through expiration. So, as long as CSCO stays above 18 through October 17, the put-sell trader keeps the premium received. That said, let’s see if the stock’s technical picture or sentiment backdrop provide any clues on the potential for CSCO to hold its ground for about the next week.

Getting Technical

From a technical perspective, the prospects for an October 18 put-sell position look thin at best. The shares are off more than 30% on a year-to-date basis, and have plunged past key long-term support at the round-number 20 level. The shares have even blown past former key support at their 160-month moving average, indicating that that the stock may have entered bear-market territory. However, the security has shown some resilience at the 18 level. Still, the next level of long-term support doesn’t kick in until the 17 level, a region that provided a floor for CSCO for most of 2005.

Monthly chart of Cisco Systems since March 2003 with 160-month moving average

The Sentiment Drivers

The sentiment backdrop for CSCO does little to improve upon an October 18 put-sell position, but there is minimal risk. The stock’s Schaeffer’s put/call open interest ratio (SOIR) of 0.74 ranks above 69% of all those taken during the past year, indicating that options traders are only moderately negative toward the security. This indicator has plenty of room for decline, especially given the equity’s poor technical performance. As such, CSCO could fall prey to additional selling pressure should options traders extend their preference for puts.

The real risk for CSCO lies with Wall Street analysts, however. According to Zacks.com, 11 brokerage firms currently rate CSCO a “buy” or better, compared to 11 “holds” and no “sells.” The lack of “sell” ratings makes me a bit nervous, especially in light of potentially waning demand for the company’s products. With the shares already in dire straights from a technical perspective, any downgrades at this point could send CSCO sharply lower.

Sentiment indicators for Cisco Systems

The Verdict?

Put-sell positions have become quite popular recently, as the combination of market volatility and the ban on short selling financial institutions has driven option premiums through the roof. You need only to look at the recent record highs for the CBOE Market Volatility Index (VIX) to see the degree to which fear and volatility has been priced into the options market. On this basis alone, a CSCO October 18 put looks rather attractive.

However, this same volatility that has driven options prices skyward can also work against a put-sell position. Furthermore, CSCO has room for deterioration within its sentiment backdrop, and the stock’s abysmal technical performance could warrant a downgrade or 2 from Wall Street analysts. For my money and risk tolerance, a purchased (not sold) November or January 2009 20 put would have been much more palatable, especially given the current economic uncertainty and the potential for unwinding bullish sentiment.

Newly revised and updated, Bernie Schaeffer’s home study program, “10 Days to Successful Options Trading,” provides a foundation for your options trading success. Includes easy-to-follow guide, CD, DVD, and a special report — Click here to learn more.

Copyright Schaeffer’s Investment Research. www.schaeffersresearch.com.