Friday Options Brief: CSCO, DELL, JCI, RRR

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 |  Includes: CSCO, DELL, JCI, RRR-OLD
by: Interactive Brokers

Cisco Systems, Inc. (NASDAQ:CSCO) – Shares in the maker of routers and switches were on a tear this week, rallying as much as 9.3% over Monday’s open to a high of $16.76 on Thursday. The stock had been in positive territory to start the final trading session of the week, but have since slipped 0.30% to stand at $16.70 as of 11:50 am in New York. Activity in put options set to expire one week from today suggest some traders are positioned to see Cisco’s shares continue to lose ground in the near term. Meanwhile, longer-dated calls indicate investors expect shares to run up against resistance at the $17.00 and $18.00 levels through April 2012 expiration.

Investors predicting a near-term pullback in the price of the underlying purchased roughly 2,600 puts at the Oct. ’14 $16 strike for an average premium of $0.10 per contract. Put buyers profit at expiration next week should shares in Cisco Systems drop 4.8% from the current price of $16.70 to breach the effective breakeven point on the downside at $15.90. Looking out to the April 2012 contract, it appears traders are selling large blocks of call options. Investors may be selling the calls outright, or writing the contracts against long stock positions. The heaviest volume was observed at the April 2012 $18 strike, where more than 10,000 calls were sold for an average premium of $1.25 each. It looks like the largest single block sold 7,481 times. The investor responsible for the sizable position keeps the $1.25 premium received on the trade as long as shares in Cisco fail to exceed $18.00 at expiration in April. Cisco’s shares last traded above $18.00 back in April 2011. Options implied volatility on the stock rose 14.7% to 39.7% in early-afternoon trade.

Dell, Inc. (NASDAQ:DELL) – The PC maker’s shares fell 2.0% to $15.24 this afternoon, however, options traders appear to be positioning for bullish movement in the price of the underlying over the long term. Notable volume in the Nov. $18 strike call, where more than 13,000 contracts changed hands in the first half of the session, suggests some strategists are itching for a substantial rally. Investors purchased at least 8,300 calls at the Nov. $18 strike for an average premium of $0.23 a-pop. Open interest patterns at that strike reveal around 2,000 calls were picked up for $0.23 each on Thursday, as well. Buyers of the call options stand ready to profit should Dell’s shares surge 19.6% in the next couple of months to surpass the average breakeven price of $18.23 at expiration. Shares in Dell have not exceeded $18.00 since September 2008. But, the stock need not rally above $18.00 necessarily for the out-of-the-money call buyers to make money on their positions. A more modest rise in shares could still see the value of the calls increase as to provide an advantageous exit price ahead of expiration. Demand for far deeper-out-of-the-money calls on Dell cropped up in the Feb. 2012 contract. It looks like one trader purchased some 2,500 call options at the Feb. 2012 $21 strike for a premium of $0.20 apiece. These contracts are a profitable investment at expiration next year in the event that shares in the computer hardware company jump 39.1% to trade above $21.20.

Johnson Controls, Inc. (NYSE:JCI) – Large-volume put spreads on the provider of automotive interiors may be the work of investors bracing for shares to drop following the company’s fourth-quarter earnings report on October 26. Put volume in excess of 18,000 contracts sticks out like a sore thumb against open interest in the sparsely populated November contract. The trader or traders responsible for the bearish strategy walk away with maximum benefit if shares in JCI plunge nearly 20.0% by expiration day. Shares in the name today are down 2.0% at $28.38 as of 1:05 pm on the East Coast. It looks like some 9,000 in-the-money puts were purchased at the Nov. $29 strike for an average premium of $2.17 apiece, while roughly equal numbers of puts were sold at the lower Nov. $23 strike for an average premium of $0.44 a-pop. Average net premium required to initiate the spread amounts to $1.73 per contract, thus establishing an effective breakeven price of $27.27. The put spread may yield profits at expiration should shares in Johnson Controls slip 3.9% lower to trade beneath $27.27. Maximum potential profits of $4.27 per contract are available on the position if the price of the underlying drops 18.95% to trade below $23.00 at expiration day next month. JCI’s shares traded as low as $24.29 this week, on the heels of a more than 43.0% decline since July 7, 2011, but haven’t traded below $23.00 since July 2009.

RSC Holdings, Inc. (NYSE:RRR-OLD) – The Scottsdale, Arizona-based company that rents out its fleet of construction and industrial equipment popped up on our scanners today due to heavier-than-usual trading in its call options. Shares in RSC Holdings, Inc. are flat this afternoon to stand at $8.38. The company is scheduled to report third-quarter earnings on October 20 after the close. Today’s trades on the stock are nearly three times that of overall open interest on RRR of 1,073 contracts. Nearly all of the trading traffic centered in the Dec. $10 strike, where more than 2,900 calls changed hands against open interest of 205 contracts. It looks like most of the call options were purchased for an average premium of $0.72 each. Call buyers may profit if shares in the rental company jump 27.9% in the next few months to exceed the effective breakeven price of $10.72 by December expiration. Shares in RSC Holdings last traded above $10.72 back on August 2. A positive earnings surprise in two weeks could see RRR’s shares and premium on the calls increase. The surge in options activity on the stock helped lift implied volatility 30.0% to 79.3% this afternoon.