Options Update: Put Volume Spikes on Cisco Systems
Shares of Cisco Systems
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PowerRating) have plunged more than 7% during the past 3 trading sessions, but today’s options activity indicates that some traders believe that the shares may be oversold. The stock began its recent plunge on Tuesday, when technology stocks were pressured due to rumors of a slowing corporate buying environment.
Cisco CEO John Chambers stoked the flames yesterday, when he stated on CNBC that the company is seeing a mixed view from its customers around the globe. The shares are under pressure again today after fellow networking concern Ciena
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PowerRating) guided fourth-quarter sales lower and stated that the company had “recently begun to experience order delays from many of {its} Tier One service provider customers.”
But options traders seem to be placing bets that a short-term bottom is at hand following the recent spate of selling pressure. In the options pits today, CSCO has seen put volume of more than 34,200 contracts, more than quadrupling the stock’s average daily put activity and placing the stock on today’s Intraday Volume Explosion List. Now, I am fully aware that, under normal circumstances, put options are bets that the underlying stock will fall. But, if you look closely at the put volume changing hands at CSCO’s September 21 strike, you will see that the vast majority of these contracts are crossing at the bid. What caught my eye today was the fact that today’s volume of more than 20,700 contracts easily outstrips open interest of 17,951 contracts at this front-month strike. Combine this with the bid activity, and we have the makings of sell-to-open put activity.
Anatomy of a Cisco Systems Put Sell
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 10:41 a.m. Eastern time, a block of 15,250 contracts traded at the bid price of $0.13, so we’ll use this trade as today’s example. Running with this put-selling theme, let’s examine how the trade actually plays out. The hypothetical trader sold 15,250 CSCO September 21 puts for $0.13, or a total credit of $198,250 — ($0.13 * 100)*15,250 = $198,250.
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 21 through September 19, 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 the next 2 weeks…
Getting Technical
From a technical perspective, it would appear that the bears have momentum on their side. CSCO has already burned through the buying pressure that prompted the shares to gap higher on August 6 following the company’s fourth-quarter earnings report. In fact, the security has filled in that gap higher in just the past 3 sessions, and is now trading below former technical resistance in the 22.50-23 region. This also places CSCO back below resistance at its declining 10-week and 20-week moving averages – trendlines that have forced CSCO steadily lower since November 2007. This development clearly does not benefit a sold CSCO September 21 put position, as it indicates that short-term selling pressure could be far from abating.
However, a look at CSCO’s monthly chart offers up a potential backstop of technical support. The shares are quickly closing in on long-term support in the 22 region – a level that has helped buoy the shares since August 2006. The problem for a sold CSCO September 21 put position is that the stock has a tendency to sell off sharply following a breach of this level. Furthermore, the next level of technical support for the equity lies at the round-number 20 level, placing the sold put in-the-money.
The Sentiment Drivers
The sentiment backdrop for CSCO does little to improve upon a September 21 put-sell position, but there is also minimal risk. The stock’s Schaeffer’s put/call open interest ratio (SOIR) of 0.82 ranks above 90% of all those taken during the past year, indicating that options traders have been more negative on the equity only 10% of the time. Given CSCO’s poor technical performance during the past year, this bearish sentiment has little contrarian impact.
The risk of additional selling pressure emerges when we focus on analyst rankings. 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.
The Verdict?
With the current level of volatility in the market, placing a put-sell position this close to the current trading range of the shares seems quite risky. Factor in the recent selling pressure across the board on the technology sector as a whole and rumblings of slackening global demand, and there are some serious concerns for a CSCO September 21 put sell. Still, the trade has merit, with long-term support at the 22 level and the potential for unwinding pessimism on the options front if the shares can rebound from their recent losses. For my money and risk tolerance, however, a September 20 strike put sell would have been much more palatable, if less profitable.
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