Bulls on the prowl in forgotten corner of tech: Options recap

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This post is for education purposes only and should not be interpreted as a trade recommendation. Options trading may not be suitable for all investors.

Remember fiber optics? Yesterday options bulls targeted a major player in the forgotten backwater of Tech.

Ciena (CIEN) knifed lower in the morning and tested its 50-day moving average for the first time since February. Traders bought the dip by amassing over 15,000 June 26 calls. They mostly paid $1.15 to $1.33.

Calls fix the price where a stock can be purchased, letting investors profit from a rally with limited capital at risk. But they can also expire worthless if no rally occurs. A more complex transaction followed:

  • 2,500 July 26 calls were bought for $1.62
  • 2,500 July 28 calls were sold for $0.85.

In case you haven’t visited our Knowledge Center recently, that’s a vertical spread. The strategy uses income from writing contracts further out of the money to help pay for options closer to the stock’s price. That lowers the cost and increases the leverage on a move of limited size. In this case, they’ll make 160 percent from the shares climbing just 7 percent by expiration. (They paid a net $0.77 and will collect $2 from a move to $28.)

CIEN clawed back from its early losses but still ended the session down 1.84 percent at $26.13. It’s been rallying since November and gapped higher thanks to better-than-expected earnings last month. Its next set of numbers is due by early June, so yesterday’s trades seem to be looking for another beat.

Overall options volume was more than 8 times the monthly average on Thursday. Calls accounted for a bullish 80 percent of the total.

Ciena (CIEN) chart. Yellow circles show volume spikes.
Ciena (CIEN) chart. Yellow circles show volume spikes.
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David Russell is VP of Content Strategy at TradeStation. Drawing on nearly two decades of experience as a financial journalist and analyst, his background includes equities, emerging markets, fixed-income and derivatives. He previously worked at Bloomberg News, CNBC and E*TRADE Financial. Russell systematically reviews countless global financial headlines and indicators in search of broad tradable trends that present opportunities repeatedly over time. Customers can expect him to keep them appraised of sector leadership, relative strength and the big stories – especially those overlooked by other commentators. He’s also a big fan of generating leverage with options to limit capital at risk.