Action in at-the-money

Cisco

(CSCO) - Get Report

options was mixed ahead of its

earnings report, although there appeared to be some speculation that the stock has a nice pop brewing in it.

As Cisco stock rose $1.06 to $35.63, prices for Cisco

options were soaring as demand for contracts intensified. While there didn't appear to be an overall theme to the trading, with traders buying both

puts and

calls in the at-the-money February 35 strike, there was a fair amount of call buying in some

out-of-the-money February calls on Cisco.

That action, according to one options trader, may be indicating that Cisco "is trading well," and it appears that "all the bad news is in" the stock's price.

Cisco has taken a beating over the last couple of weeks. On Jan. 24, it closed at $42.56 and, using a late morning price of $35.63, that marks a drop of about 16.3%.

One money manager agrees with the theory that any bad news that might be forthcoming in Cisco is already priced into the stock. The recent selling in Cisco stock was "probably overdone on the downside," says money manager David Schultz of

Summit Capital Holdings

. "If they don't disappoint, it could actually signal a bottom for the

Nasdaq

, which would be good."

Judging from some of the Cisco options action, speculators were willing to take a shot at just that possibility.

The out-of-the-money February 40 calls were active on the

American Stock Exchange

and the

Chicago Board Options Exchange

, or CBOE. Overall, almost 24,000 February 40 calls have traded, of which nearly 17,000 changed hands on the Amex. The action drove the price up 5/16 ($31.25) to 13/16 ($81.25).

James Quinn of

Letco

, the designated primary market maker of Cisco options at the CBOE, says customers are predominantly buying the February 40 calls.

Generally, traders and investors buy out-of-the-money calls because the profit potential on such a trade is much more dramatic than if they bought

in-the-money calls; if the stock rallies, of course, the option goes in the money. Traders buy call options when they're bullish about a stock's or an index's prospects.

Typically, in trading ahead of earnings reports, options activity can point to a developing consensus on how a company will report. That hasn't been the case for Cisco options lately, according to some market pros.

Reflecting a tug-of-war, open interest (the total number of options contracts not yet exercised or allowed to expire) is very close for the February 35 calls and puts. As of Monday's close, open interest stood at about 56,000 contracts for the February 35 calls and about 52,900 for the puts.

On Tuesday, volume in those two options was leaning slightly toward the call side, with consolidated volume of about 12,000 in the February 35 calls and 10,500 in the puts. Investors buy puts either to speculate on further downside in the underlying security or as protection against a long position.

On the American Stock Exchange, the February 35 calls were active, with almost 4,700 contracts changing hands up 3/8 ($37.50) to 2 1/2 ($250). Also on the Amex, the February 35 puts were active with 5,900 contracts trading, down 1/2 ($50) to 2 ($200). Cisco February 35 options were active also on the CBOE.

Overall, Letco's Quinn says that there have been buyers of both puts and calls in the February 35 strike.

Cisco is set to post earnings after Tuesday's close, and today the stock slumped $1.50 to $34.06. The

First Call/Thomson Financial

33-analyst consensus estimate calls for the company to earn 19 cents a share in its fiscal second quarter. A three-analyst First Call consensus calls for the company to post $7.223 billion in revenue.

The CBOE says trading of options on the

iShares S&P 100 Index Fund

(OEF) - Get Report

, or OEF, will begin tomorrow. The OEF is an exchange-traded fund that trades exclusively at CBOE and was the first exchange-traded fund to trade at the CBOE.

OEF options will trade like stock options and will have an American-style exercise feature (meaning the options holder can exercise at any time prior to the options' expiration) and will be settled by physical delivery. OEF options will also trade in decimals. The options will trade in the

S&P 100

options pit.