Business Magazine

Bullish Player Initiates Three-Legged Spread on Cisco Systems

Posted on the 18 March 2011 by Phil's Stock World @philstockworld

Today’s tickers: CSCO, CECO, SPG & GE

CSCO - Cisco Systems, Inc. – Shares in the world’s largest maker of networking equipment increased as much as 2.5% during the session to secure an intraday high of $17.42 after the company announced it will pay its first ever cash dividend on April 20, to shareholders of record on March 31, 2011. Cash-rich Cisco Systems said the dividend will amount to $0.06 a share. Shares in the San Jose, CA-based manufacturer of switches and routers are still hovering around their lowest level since April 2009, and fell to a new 52-week low of $16.97 earlier this week. But, it looks like one big option strategist is looking for the price of the underlying to rebound ahead of January 2012 expiration. The investor initiated a three-legged bullish play, selling puts to partially finance the purchase of a call spread, in order to position for brighter days in CSCO’s future. The trader sold 40,000 puts at the January 2012 $15 strike at a premium of $0.95 each, purchased the same number of calls up at the January 2012 $17.5 strike for a premium of $1.72 per contract, and sold 40,000 calls at the higher January 2012 $22.5 strike at a premium of $0.42 apiece. Net premium paid to initiate the spread amounts to $0.35 per contract, thus positioning the investor to make money in the event that Cisco’s shares rally another 2.5% over today’s high of $17.42 to surpass the effective breakeven price of $17.85 by expiration. Maximum potential profits of $4.65 per contract are available to the trader should shares in CSCO jump 29.2% to exceed $22.50 ahead of expiration day next January. Shares in the name last traded above $22.50 back in November 2010.

CECO - Career Education Corp. – Put options on the for-profit provider of education services are active this morning with shares in Career Education Corp. slipping from an intra-session high of $21.02 at the start of the session to a low of $20.50. The stock currently stands 0.75% lower on the day at $20.53 just before 12:40pm in New York. More than 3,280 puts changed hands at the April $20 strike against previously existing open interest of just 743 contracts. It looks like most of these put options were purchased for an average premium of $0.85 each by investors positioning for CECO’s shares to pull back further ahead of April expiration. Put buyers are prepared to profit should the price of the underlying stock drop 6.7% from the current price of $20.53 to breach the effective breakeven point on the downside at $19.15 by expiration day next month. CECO’s shares hit a year-to-date low of $18.40 on January 10, 2011, which is well above the stock’s 52-week low of $16.36 on October 14, 2010.

SPG - Simon Property Group, Inc. – The retail REIT that owns, develops, and manages regional malls and other real estate properties attracted bullish options traders during the session with the value of its shares rising as much as 1.75% during the session to a high of $105.06. It looks like most of the volume in Simon Property Group options took place in the July contract where investors appear to be selling puts to buy bull call spreads. Options traders sold approximately 2,000 puts at the July $90 strike at an average premium of $2.38 each, picked up around the same number of calls at the July $105 strike for an average premium of $5.97 per contract, and sold some 2,000 calls at the July $110 strike at an average premium of $3.50 a-pop. Average net premium paid to initiate three-legged bullish spreads reduces down to just $0.09 per contract. Investors employing this strategy start to make money if Simon Property Group’s shares rally above the average breakeven price of $105.09 ahead of July expiration. Bullish players could walk away with maximum potential profits of $4.91 per contract should shares in SPG increase 4.7% over today’s high of $105.06 to exceed $110.00 by expiration day in July.

GE - General Electric Co. – Shares in General Electric rallied 2.75% today to secure an intraday high of $19.75, but the purchase of a large chunk of deep out-of-the-money put options in the September contract suggests one options player has his parachute at the ready in case the conglomerate’s shares should come crashing down in the next six months. One block of 45,000 puts were picked up at the September $12 strike for a premium of $0.18 per contract within the first 12 minutes of the opening bell this morning. The 45,000 contracts are roughly 4.6 times greater than the number of puts represented by open interest at that strike. The put buyer, from an at-expiration view, makes money if General Electric’s shares plunge 40.1% off today’s high of $19.75 to breach the effective breakeven price of $11.82. Options implied volatility on GE is currently down 10.7% to stand at 30.55% as of 1:10pm in New York.

Andrew Wilkinson
Senior Market Analyst
ibanalyst@interactivebrokers.com

Caitlin Duffy
Equity Options Analyst

 


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