Option Activity Alert: CSCO, HPQ, MYL, WCC

CSCO – Cisco Systems, Inc. – One big options player left huge prints in long-dated Cisco Systems put contracts in the first half of the trading day as part of a protective spread that was tied to the purchase of a large position in the underlying. Shares of the manufacturer of switches and routers are currently flat at $19.61 just before 1:00 pm in New York. The investor responsible for the transaction appears to have established a delta neutral hedge, buying some 49,000 deep in-the-money puts at the January 2012 $22.5 strike for an average premium of $4.31 each, and selling the same number of puts at the lower January 2012 $15 strike at an average premium of $0.83 apiece, against the purchase of stock at $19.60 a share on a 0.43 delta. Delta on a spread of this size points to the purchase of approximately 2.1 million shares of the underlying. Perhaps the investor believes Cisco’s shares have been beaten and battered enough following the firm’s disappointing first-quarter earnings report earlier this month, which pushed the stock down more than 15%. Cisco’s shares slid 21% from an intraday high of $24.50 on November 10 to hit a new 52-week low of $19.34 on November 16, 2010. The trader seems to be taking a cautiously optimistic stance on the stock, buying up shares while they are down, but also paying for downside protection in case Cisco takes a turn for the worse. Purchasing the put spread cost the investor a net premium of $3.48 per contract, and yields protection should shares in CSCO trade below the average breakeven point at $19.02 ahead of expiration in January 2012. The largest maker of networking equipment earlier said it added as much as $10 billion to its stock repurchase program, perhaps in an attempt to mollify investors reeling from the painful aftermath of November 10 earnings. More than 205,000 option contracts have changed hands on CSCO as of 1:15 pm.

HPQ – Hewlett-Packard Co. – Options on the global tech giant caught our eye after one strategist initiated a risk reversal, selling calls and buying puts against the purchase of HPQ shares in the December contract, within the first hour of the trading session. Hewlett-Packard’s shares are up 0.45% at $41.88 as of 12:00 pm. The transaction may be the work of a cautiously optimistic investor positioning for shares in HPQ to rally following the firm’s fourth-quarter earnings report after the closing bell on November 22. It looks like the trader sold 5,300 calls at the December $45 strike for a premium of $0.37 apiece in order to buy the same number of puts at the lower December $39 strike at a premium of $0.57 each. The investor paid a net $0.20 per contract on the risk reversal, which was tied to the purchase of a large position in the underlying shares at $41.86. It seems the trader is hedging the long stock position with protective put options, and reducing the cost of protection by selling out-of-the-money calls. The investor benefits from share price appreciation and may have some or all of the shares, depending on the size of the underlying position relative call options sold, called away from him at $45.00 apiece if the calls land in-the-money by expiration day next month. The put options yield downside protection in the event that the tech company’s shares tumble sufficiently following earnings, or ahead of expiration in December.

MYL – Mylan, Inc. – Options traders are constructing bullish positions on the manufacturer of generic and branded generic pharmaceuticals this morning by picking up out-of-the-money call options in the December contract. Shares in Mylan are currently up nearly 0.80% to stand at $19.40 as of 11:35 am in New York. The company learned earlier that a judge in London ruled that Cephalon Inc., which makes a sleep disorder drug known as Provigil, may not block Mylan from selling generic versions of the drug in Britain ahead of a patent trial scheduled for April 2011. Investors hoping to see Mylan’s shares extend today’s rally looked to the December $20 strike to pick up approximately 2,600 calls for an average premium of $0.36 apiece. Call buyers at this strike make money if the price of the underlying stock rises 4.95% over the current price of $19.40 to surpass the average breakeven point at $20.36 by December expiration. Bullish sentiment on the stock spread to the higher December $21 strike where more than 5,500 calls changed hands versus previously existing open interest of just 742 contracts. It looks like at least 3,400 of the calls were purchased at an average premium of $0.18 each. Traders holding these contracts make money if Mylan’s shares surge 9.2% to trade above the average breakeven price of $21.18 by expiration day. The rise in investor demand for call options on the pharmaceuticals company lifted the stock’s overall reading of options implied volatility as much 17.9% earlier in the session to an intraday high of approximately 32.47%.

WCC – Wesco International, Inc. – The electrical components, equipment and services firm popped up on our ‘hot by options volume’ market scanner after one bullish player dabbled in December contract put options. Shares in Wesco International, which agreed Wednesday to buy TVC Communications LLC for $246 million, are currently lower by 0.40% to stand at $47.41 as of 12:35 pm. It looks like the options optimist sold more than 6,500 December $40 strike put options to pocket premium of $0.10 per contract. The investor keeps the full $0.10 per contract, or roughly $65,000, as long as Wesco’s shares exceed $40.00 through expiration day next month. Some 7,275 puts changed hands at the December $40 strike today versus paltry previously existing open interest of just 230 contracts. The trader is obliged to buy shares of the underlying stock at an effective price of $39.90 each if the puts land in-the-money by expiration, but this scenario seems unlikely as it would require WCC’s shares to plummet 15.6% from the current price of $47.41 in the next 28 days to expiration.

About Andrew Wilkinson 1023 Articles

Affiliation: Interactive Brokers

Andrew Wilkinson is the senior market analyst at Interactive Brokers Group, where he provides daily commentary and analysis on U.S. equity options trading throughout the trading day. Andrew provides webinars designed to explain option-related trading scenarios covering futures, fixed income, forex and equities.

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