Sun, Cisco Put-Option Selling May Be a Bid for the Bottom

Updated from 1:37 PM ET

Some massive put sellers in Sun Microsystems (SUNW) and Cisco (CSCO)options highlighted trading in the market, reflecting a cautiously positive wager on those two stocks bouncing back before the end of April.

Volatility Index
Today	% Change
30.73	+5.86
Source: ILX

Shares of Sun rose 19 cents to $20, while Cisco slipped 19 cents to $23.81. Earlier in the session, Cisco hit a new 52-week intraday low of $23.25.

Nasdaq Volatility Index
Today	% Change
76.95	+4.77
Source: ILX

In Sun, the selling totaled around 35,000 contracts in the April 17 1/2 puts. The investor -- likely some type of fund or professional trading desk -- could be an investor making a bullish bet that Sun's stock is about as beaten up as it can be and that good times may be ahead for the stock. At stake is an options position equivalent to 3.5 million shares of Sun stock.

It also could be an investor selling the puts in an effort to acquire stock at a preset price, because by selling the put options, that investor can be obligated to buy the shares are the strike price if the stock is at or below that level. Either way, by making the trade, the investor, or whichever institution it is, doesn't mind buying Sun at 17 1/2, which is the strike price on the puts.

The largest single trade was on the American Stock Exchange, where a 10,000-contract block traded this morning down 1/8 ($12.50) at 1 1/16 ($106.25).

Sun itself could also be behind the trade, using put options to acquire stock as part of a recently announced stock buyback program, some options traders speculated. In an analyst call last Thursday, Sun said it plans to buy back up to an additional $1.5 billion in Sun stock. A Sun representative declined to comment.

Dell (DELL) and Microsoft (MSFT) were frequent put-sellers are part of corporate buyback programs. And in the heyday of the bull market, the companies would generate huge capital gains by selling put options that almost always expired worthless because the stocks were consistently rising.

The size of the trading took some options pros a little by surprise. Alan Goldstein of Five Dollar Trading, a market making firm at the Chicago Board Options Exchange, said that there hasn't been big block volume in Sun options for a while, so the trading today was "sort of unusual."

Investors sell puts to collect premium in exchange for taking on the obligation to buy the stock if the options are exercised.

Conversely, when an investor buys a put option, it gives the investor the right but not the obligation to sell a security for a specified price by a certain time. Investors buy put options to speculate in a further downturn in a security or to protect a long position.

Meanwhile, an investor sold 18,000 out-of-the-money April 20 Cisco put options this morning on the Philadelphia Stock Exchange. One options trader called the trade "gutsy." The April 20 puts traded up 1/16 ($6.25) to 1 1/16 ($106.25).

The investor who sold those calls is betting that by April expiration, Cisco will be trading above $20 and that the puts will expire worthless. Even if it doesn't expire worthless and the option is exercised and the investor has to buy the stock; by making the trade initially, the investor is saying it doesn't mind owning the stock at $20.

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As expected, the skirmish on the Nasdaq 100 unit trust (QQQ) is picking up.

The Pacific Exchange said today it would list options on the QQQ beginning tomorrow with Knight Financial Products, part of Knight Trading (NITE), as the lead market maker. Yesterday, the CBOE began trading options on the wildly popular QQQ, which until this week had an exclusive home on the Amex.

The CBOE said today that volume in QQQ options was 71,572 contracts yesterday, the first day of trading at the exchange, which made options on the QQQ the second most actively traded index option at the exchange.

In addition, the Philadelphia Stock Exchange has reached a deal with the Nasdaq to list QQQ options. The all-electronic International Securities Exchange said it was seeking a deal with Nasdaq, which is the parent of the Amex, to list the product.

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