It's Not the Heat, It's the Volatility, Cisco Options Show

As earnings season rambles on, the market appears to be growing more accustomed to the spate of bad news from companies.

Volatility Index
Today	% Change
30.99	+3.1%
Source: ILX

On the heels of Cisco's(CSCO Quote) announcement of a fiscal third-quarter earnings shortfall and subsequent jaw-dropping $3 billion restructuring charge Monday, the Nasdaq Composite Index just shrugged its shoulders. The market's reaction may remind some investors of the black knight in Monty Python and the Holy Grail who calls a severed arm "just a flesh wound." Think back to last quarter when Cisco missed by a penny, sending the market into a tailspin.

Nasdaq Volatility Index
Today	% Change
73.14	VXN 0.3%
Source: ILX

The question now is whether conditions will worsen or whether the market's tolerance for bad behavior will pay off in the long run. That kind of speculation was being played out in the options market today as volumes were high. There was heavy volume on Cisco options with April 15 puts trading more than 5,700 contracts at midday. A put is essentially the right to sell the stock at a fixed price by a certain date. In this case, a holder of a Cisco May 15 put has the right (but not the obligation) to sell 100 shares of Cisco at $15, regardless of what happens to the price of the stock.

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Volatility on Cisco May 17.50 options also soared high in reaction to last night's news, with more than 5,000 calls purchased, compared to 5,700 puts. This kind of volatility indicates the speculation on both sides of options for Cisco and its tech minions, too.

The Chicago Board Options Exchange volatility index, or VIX, as the fear gauge is commonly called, showed an upswing of 3.1% to 30.99 today. The Nasdaq volatility index, or VXN, was down slightly to 73.14, but very much on the high end of its usual range.

According to options strategist Paul Foster of 1010WallStreet.com, higher levels of volatility point toward an adaptation to what he calls the "new era." Professional investors have grown accustomed to this new climate and are beginning to "act more aggressively." Traders are no longer sweating the current economic conditions, but rather adapting to the environment.

With professional investors starting to assimilate to this new climate, individual investors won't be far behind. After all, much like the humid dog days of summer, it takes a little while before you get used to it.