great article from our friend Brendan at the DJ. A link to the article here
DJ OPTIONS REPORT: Cisco Sees Call To Action In Options Market
DJ OPTIONS REPORT: Cisco Sees Call To Action In Options Market
By Brendan Conway
Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--The options market is ready for Cisco Systems Inc.
(CSCO) to take action.
Bullish calls to buy the technology company's stock were a hot item Wednesday,
thanks to Chief Executive John Chambers' vow for "surgical precision" to "fix"
the company's portfolio. Cost cuts and divestitures were the subject of trader
and analyst speculation as Cisco's stock led the Dow Jones Industrial Average
Wednesday, gaining 88 cents, or 5.1%, to $18.10.
"A lot of traders are looking for something to happen, like potentially
spinning businesses off," said Caitlin Duffy, options analyst at Interactive
Brokers. The chance of a rebound in Cisco's stock is "not something options
players want to miss out on, or stand in the way of," she added.
Trading was heaviest in bullish calls to buy the stock at $18 by the end of
next week. At a price of 31 cents, traders are positioned to profit if the stock
surpasses $18.31 by April 15.
Cisco's options are among the most heavily exchanged contracts in the market,
which means many other traders capitalized on the jump in the stock to unwind
old bullish positions. It has been tougher to do that in recent months without
losing money, as the stock has sagged since Cisco's last earnings report.
Traders closing out their positions may have taken a cue from the implied
volatility of Cisco's options. Implied volatility is the market's best guess as
to whether a stock is likely to stage big swings in the future. Although there
were plenty of traders acting on the chance for bigger gains in Cisco's stock in
the coming weeks and months, the volatility reading didn't make much of a move
Wednesday, Interactive Brokers' Duffy said.
RBC Capital Markets analysts were among those anticipating that Cisco may
downsize or divest some of its businesses. "Optical, application delivery,
Linksys, set-top boxes, Flip, and Umi are some segments that we think should be
cut," the analysts wrote.
Volume in Cisco's bullish options hit the highest level in nearly two months
-- 393,000 calls changed hands versus 149,000 bearish puts, Trade Alert data
showed.
More broadly in the options market, the CBOE Volatility Index continued to
reflect the calmer mood in the markets the last few weeks as it dropped 0.47, or
2.7%, to 16.78. The measure tends to fall when stocks rise and investor
confidence increases. It jumped above 30 last month as tensions in Libya erupted
and the price of oil surged, but quickly fell back below its historical average.
Retail stocks and specifically Gap Inc. (GPS) were another big draw in the
options market Wednesday, ahead of same-store sales reports. Much of the
activity looked bearish or protective in nature.
Volume in put options to sell the SPDR S&P Retail exchange-traded fund (XRT)
was the heaviest in six weeks as the ETF touched a fresh 52-week high. Most of
the activity was driven by a single large trade known as a "put butterfly" that
appeared to target a 5.6% decline in the ETF by mid-May, WhatsTrading.com
analyst Frederic Ruffy wrote in a report to clients.
Roughly 99,000 puts to sell the ETF changed hands versus 2,800 calls to buy
it. The retail ETF rose 16 cents, or 0.3%, to $52.13 recently.
Gap's bearish puts saw their heaviest volume since early January. About 20,000
bearish puts to sell the stock changed hands versus 5,000 calls to buy it.
"These investors likely expect downside from current levels," Susquehanna
Financial Group derivatives strategists wrote concerning the put buyers.
-By Brendan Conway, Dow Jones Newswires; 212-416-2670;
(END) Dow Jones Newswires
04-06-11 1530ET
Copyright (c) 2011 Dow Jones & Company, Inc.
No position at this time. Position declarations are believed to be accurate at time of writing but may change at any time and without notice.
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