Big Cisco Call-Option Trades Show Optimism

Options trading was robust in Cisco (CSCO Quote) options as at least one investor put on a bullish trade in the networking giant's options, leaving a lot of time for the strategy to work.

Volatility Index
Today	% Change
31.64	-4.67
Source: ILX

Early in the session, Cisco flirted with a fresh new 52-week intraday low, but it managed to rebound and was up 25 cents to $18.125. Cisco traded as low as $17.63 this morning, just above its 52-week intraday low of $17.50, before staging a recovery.

Nasdaq Volatility Index
Today	% Change
68.07	-1.63
Source: ILX

Highlighting Cisco trading on the Chicago Board Options Exchange this morning, an investor bought about 10,000 January 25 calls and sold about 10,000 of the January 32 1/2 calls. The trade is known as a bull call spread.

A bull call spread is initiated when an investor buys a call option and simultaneously sells another call option with a higher strike price and the same expiration date. A bull call spread limits risk and also puts a cap on the trade's profit potential.

Buying calls gives an investor the right to buy a stock at a certain price before a certain date and gets you some appreciation in the options' price if the stock rises. Selling the calls -- being short the calls --- with the higher strike price obligates the investor to sell shares of stock at that price if the investor is assigned at expiration.

The total risk in the position is the net debit for putting on the position, while the maximum profit in a bull call spread is the difference between the strike prices minus the amount paid to establish the strategy. Break-even on a bull call spread is the lower strike price plus the debit amount.

On the Philadelphia Stock Exchange, the same bull call spread traded (possibly the work of the same investor who made the trade on the CBOE). On the PHLX, 15,000 of the January 25 calls traded up 1/16 ($6.25) to 2 9/16 ($256.25), while 15,000 of the January 32 1/2 calls traded down 5/16 ($31.25) to 1 1/4 ($125).

But overall, the trading in Cisco options hasn't been reflective of the bullish movement in the underlying stock, said James Quinn of Letco, designated primary market maker in Cisco options at the CBOE.

By establishing a position with options that expire in January, the investor pays for the time to wait out the current market volatility.

Cisco April 15 puts were seeing heavy action on the CBOE and the American Stock Exchange. On the CBOE, the puts fell 1/16 ($6.25) to 1/2 ($50) on volume of more than 20,000 contracts. Open interest (the total number of options contracts that have not been exercised or allowed to expire) as of last night's close in the April 15 puts was more than 55,100 contracts. There was a notable amount of buying of the puts, however, and that could be a matter of a trader closing out a position in the puts the investor had previously sold.

On the Amex, nearly 10,000 of the April 15 puts traded.