Thursday Options Brief: CSCO, LVLT, AMGN & IBB

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Includes: AMGN, CSCO, IBB, LVLT
by: Interactive Brokers

Cisco Systems, Inc. (NASDAQ:CSCO)Frenzied options trading ensued on Cisco Systems right out of the gate this morning as shares of the world’s largest maker of computer networking equipment plunged as much as 17.3% to hit an intraday low of $20.25 after profit and sales forecasts from the firm failed to meet analysts’ expectations. Cisco said it expects to generate net income of $0.35 a share, at most, on revenue of $10.1 to $10.3 billion in the fiscal second quarter, while analysts projected the company would earn profits of $0.42 a share on revenue of $11.1 billion. The earnings disappointment and the sharp descent in the price of Cisco’s shares inspired some analysts to slash target prices and ratings on the networking equipment giant. Yet, it looks like many investors are utilizing options to position for a recovery in Cisco’s shares. It seems a number of options traders see the new value of the shares as attractive and ripe for harvest. More than 1.03 million option contracts have changed hands on Cisco Systems as of 1:15 pm in New York with shares presently trading lower by 15.9% to stand at $20.59. Investors are favoring calls over puts on the stock today. Options expiring in November, December and January 2011 are the most heavily trafficked right now with the greatest volume generated in out-of-the-money calls in these expiries. Nearer-term options players are buying more of the calls exchanged at out-of-the-money strikes as compared to those selling the contracts. It looks like investors are scooping up cheap calls at deep out-of-the-money strikes, which could result in significant profits in the event that CSCO’s shares reverse course before the end of the year. Similar call buying is taking place in longer-dated options, as well. Put buyers and sellers are also on the scene. Out-of-the-money put sellers that do not expect shares to fall much further are taking advantage of the time value baked into longer-dated contracts, selling for example at least 10,000 puts at the January 2011 $19 strike for an average premium of $0.41 each. Investors short the puts keep the full premium as long as shares exceed $19.00 through January 2011 expiration. Options implied volatility is lower by 3.0% this afternoon to arrive at 30.25% as of 1:15 pm.

Level 3 Communications, Inc. (NASDAQ:LVLT) Bullish tacticians made a bee-line for LVLT options this morning on news Netflix, Inc. agreed to have the Broomfield, CO-based firm provide video-streaming and storage services starting next year. Shares in Level 3 Communications shot up 17.475% to touch an intraday high of $1.21. Investors positioning for further near-term upside movement in the price of the underlying stock purchased calls and sold puts in the November contract. Bulls picked up about 1,000 in-the-money calls at the November $1.0 strike for an average premium of $0.20 each, while more optimistic individuals coveted more than 2,100 calls at the higher November $1.5 strike at an average premium of $0.05 apiece. Higher-strike call buyers make money if LVLT’s shares surge 28.1% over today’s high of $1.21 to surpass the effective breakeven price of $1.55 by November expiration. Other optimists sold approximately 2,000 in-the-money puts at the November $1.5 strike to take in an average premium of $0.29 per contract. Put sellers keep the full premium if LVLT shares exceed $1.50 by expiration day, but are apparently willing to have shares of the underlying put to them at an effective price of $1.21 each in the event that the puts land in-the-money at expiration. Call buyers also targeted the December $1.0 and June 2011 $1.5 strikes to initiate longer-term bullish stances on the stock. LVLT’s overall reading of options implied volatility is up 21.8% at 110.97% following the NFLX news and on increased demand for its options.

Amgen, Inc. (NASDAQ:AMGN)Near-term bullish options traders expecting Amgen’s shares to rally are initiating debit call spreads on the biotechnology firm in the November contract. Amgen’s shares are down slightly by 0.15% as of 1:00 pm in New York to trade at $54.62. It looks like traders purchased roughly 13,000 calls at the November $55 strike for an average premium of $0.84 apiece, and sold about the same number of calls at the higher November $57.5 strike at an average premium of $0.22 each. Investors paid an average net premium of $0.62 per contract to establish the spreads. Thus, traders stand ready to make money should Amgen’s shares rally 1.83% over the current price of $54.62 to surpass the average breakeven point at $55.62 by November expiration day. Call spreaders may walk away with maximum potential profits of $1.88 per contract if shares in AMGN surge 5.3% to trade above $57.50 by expiration next Friday.

iShares Nasdaq Biotechnology Index Fund (NASDAQ:IBB)The iShares Nasdaq Biotechnology Index Fund popped up on our ‘hot by options volume’ market scanner this morning after options strategists initiated three-legged bearish spreads in the December contract. Shares of IBB, an exchange-traded fund that seeks to provide investment results that correspond with the price and yield performance of the Nasdaq Biotechnology Index, are currently down 0.10% at $87.86 as of 12:05 pm in New York trading. It looks like the investors are preparing for shares to continue lower by essentially selling call options to offset the cost of debit put spreads. Traders sold 1,000 calls at the December $90 strike for an average premium of $1.01 each, picked up 1,000 puts at the December $85 strike at an average premium of $1.29 per contract and sold the same number of puts at the lower December $80 strike for an average premium of $0.44 a-pop. The three-legged transaction yields a net credit of $0.16 per contract, which investors keep as long as the December $90 strike calls land out-of-the-money at expiration. Additional profits start to accumulate should shares of the fund decline another 3.25% from the current price of $87.86 to trade below $85.00 by expiration day next month. Maximum potential profits, including the credit received, of $5.16 per contract are available to investors should shares in the IBB plunge 8.95% to breach the $80.00-level by December expiration.