Tech traders bet against blue chip breakout
05/02/17

Some options traders apparently think enthusiasm is running too high in a major tech stock.

Heavy call selling was detected yesterday in Cisco Systems (NASDAQ: CSCO), led by 8,100 of the May 34.50 contracts for $0.37 and $0.38. Almost all the activity occurred halfway through the morning as the stock tried to claw its way back from an early drop.

Calls are options to buy a security, but when they’re sold they create an obligation to deliver shares at a specific price. Traders can to use the strategy when they think a certain level won’t be broken because then they profit from the premium received from the sale. 

In this case, the level is $34.50. Not only is it almost exactly the 52-week high from February, it was also near a peak from 2007. It marks the top of the range that’s held CSCO in check since the dot-com bubble broke in early 2001. In other words, veteran chart watchers might not see this as just any old resistance line. 

There also seems to be some logic behind the timing because earnings are due on May 17, just two days before those calls expire. Maybe they think there’s already too much enthusiasm in the name – especially following a 24 percent run in the last year.

Cisco Systems (CSCO) 1-yr chart

Source: OptionsHouse by E*TRADE

Sure, the last set of numbers on February 15 beat estimates on the top and bottom lines.1 But most of the bullishness is based on hopes the company will manage to reinvent itself as a network-security provider.2 After all, a stagnant Ethernet-switching business has keep CSCO from going anywhere for almost two decades while other tech names like Alphabet (NASDAQ: GOOGL), Apple (NASDAQ: AAPL), and Facebook (NASDAQ: FB) have emerged and sent the Nasdaq-100 index to new record highs.

Monday’s call seller may own shares in CSCO, which they’d be willing to unload should the stock break those old highs. In that case, they’d realize an exit price of about $34.87 to $34.88 (stock price plus the premium collected). That same range would represent the breakeven point if they didn’t have an existing position, but then they’d also face the potential of painful losses if it rallies higher. 

In summary, CSCO has been running along with other tech stocks, but at least one big options trader thinks this is already as good as it gets.

 

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1. Reuters: Cisco profit beats on strong demand for security products. 2/15/17..

2. Credit Suisse: Switch On - Transforming the Right Way. 4/27/17.