Bears make big gains in $CSCO

Cisco (CSCO) beat top and bottom line estimates after the closing bell yesterday but guided its Q1 revenues lower, delivering gains to bearish option traders.

On Aug. 11, Market Rebellion’s Unusual Activity scanners identified the purchase of 10,000 Weekly $46.50 puts expiring on Aug. 14 as part of a bearish spread for $0.66 to $0.70 with shares at $48.14. These were clearly new positions, as open interest in the strike was a mere 1,864  contracts before the activity appeared.

Those puts traded up to $4.10 this afternoon, more than 5.5 times their purchase prices. The stock declined 11.88% in the same time frame, illustrating the kind of leverage that can be achieved through options.

Long puts lock in the price where a stock can be sold no matter how far it might drop, gaining value in a selloff with the potential for significant leverage. The contracts can be purchased either as an outright bearish bet or a hedge on a long-stock position.

CSCO closed down 11.19% today at $42.72. The network-technology giant’s price target was lowered to $48 and $46 at RBC Capital and JPMorgan, respectively, this morning.