Options Report: Traders Eye Cisco, Prowl For Other Deals
By KOPIN TAN
Of DOW JONES NEWSWIRES
NEW YORK -- Investors kept their eye on Cisco Systems in Tuesday's session but did not overlook other opportunities in the options market.
Expectations stayed high in Cisco just ahead of the technology bellwether's much-anticipated earnings report. At least one institutional investor sold more than 10,000 contracts of the March 35 puts. Another institution bought at least 10,000 contracts of the February 40 calls, along with other investors who flocked to these out-of-the-money calls.
Both on the surface are bullish trades, although investors could be making long calls to cover short stock positions. After all, the network equipment maker had slid about 15% in the past two weeks alone. Even as investors brace themselves for a weak long-term outlook, many seem to feel that the bad news already is factored into the stock price. Bears, however, point to similarly high hopes preceding the last earnings report, where Cisco beat estimates by its customary penny but saw the stock fall 9% in the weeks afterward.
Cisco stock most recently gained $1.06 to $35.63. More than 31,000 contracts of the February 40 calls had traded, with these options gaining 19 cents to 75 cents at the Chicago Board Options Exchange. Open interest was more than 61,000. The February 35 puts lost 63 cents to $1.88 on American Stock Exchange volume of 12,827 contracts, with 7,659 contracts traded at other exchanges, compared with open interest of 52,911.
Away from the whirl surrounding Cisco, options traders tried to stay afloat in the choppy cross currents. Despite a cautionary outlook from Applied Micro Circuits Corp., tech stocks and the Nasdaq Composite Index stayed remarkably resilient Tuesday.
Elliot Spar, Gruntal & Co.'s options strategist, saw some parallels between this and the late December tech-stock bottom, when tech issues began to head into its January rally despite the continuing barrage of weak earnings news. In a market like this, it is important for investors to observe the rotation, and seize the opportunity to take up sought-after positions.
For instance, with financial stocks losing ground Tuesday amid more credit quality concerns and analyst downgrades, investors who want to be long bank stocks can take advantage of the opportunity. Among Spar's recommendations, for instance, and for investors who like MBNA Corp., is to buy MBNA stock while selling the June 35 calls to generate some premium income. With the stock most recently trading just shy of $35, the June 35 calls were at $3.60 at the CBOE.
Meanwhile, put options of bank stocks like Bank of America traded actively. UBS Warburg downgraded Bank of America, at a time when many investors were expecting bank stocks to benefit from the Federal Reserve's interest rate cuts.
Bank of America stock fell $2.39 to $50.88. Trading was mixed in its options, with investors buying puts earlier in the session and more people selling them as the day wore on, one trader said. The March 50 puts gained 85 cents to $2.50 on CBOE volume of 1,179 contracts, with 520 contracts trading away, compared with open interest of 5,656. The February 47.50 puts were at 40 cents on Amex volume of 3,000 contracts, compared with open interest of 3,797.
The CBOE's Market Volatility Index, or VIX, which measures certain Standard & Poor's 100 option prices to determine investor sentiment, edged down 0.63 to 23.76.
The VIX is also called the options market's fear gauge and recently has tended to range between 20 and 30. It rises to indicate that traders are becoming anxious about the market, while a dip reflects optimism.
While VIX measures broad market sentiment, the CBOE has another barometer that uses certain Nasdaq 100 options prices to more accurately gauge the implied volatility of technology stocks. The CBOE Nasdaq Market volatility index, or VXN, on Tuesday lost 2.17 to 60.76.
VXN - which industry pros have taken to pronouncing as "Vixen" - has ranged between 40 and 61 nearly 73% of the time over the recent two years, with a rise indicating increasing anxiety and a dip showing optimism.
The American Stock Exchange's new tech volatility index, or QQV, which is based on its QQQ or Nasdaq 100 Trust option prices, most recently fell 1.55 to 52.68.
Elsewhere in the options market:
- Applied Micro Circuits Corp.'s put options were among the most heavily traded Tuesday. An investor who had previously taken up a long position in the February 70 puts saw it pay off when nervous investors sent the stock down 12.4% Tuesday, after the company said cancellations in existing orders could affect its outlook.
With the stock tumbling $8.13 to $56.25 Tuesday, the investor moved the strike price of his position lower, buying the February 60 puts while selling the February 70 puts to take money off the table. At the CBOE, which captured nearly all of the volume, the February 70 puts gained $5.50 to $14.25 on volume of 10,050 contracts, compared with open interest of 11,738. The now in-the-money February 60 puts gained $3.63 to $6.50 on volume of 12,132 contracts, compared with open interest of 2,384.
- Option put/call ratios increased but remained in neutral territory. The CBOE's equity put/call ratio was 0.56.
- The CBOE's index put/call ratio was 1.40.
- By Kopin Tan, Dow Jones Newswires; 201-938-2202
kopin.tan@dowjones.com
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