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If you had to pick a technology name to stick with for the long haul, you’d be hard pressed not to consider Cisco (CSCO). Specializing in networking products and services, Cisco isn’t particularly exciting. However, it will almost certainly be perpetually relevant. Plus, the company provides a decent 2.64% annual yield. No, it’s not overwhelmingly generous but you’ll get rewarded for merely holding the security.
Subsequently, it would take a brave soul to bet against CSCO stock. Unless there is a compelling reason to do so, you should default to giving the underlying enterprise the benefit of the doubt. The one exception possibly is if the smart money took a contrarian bet against it. While it’s an incredibly nuanced argument, the institutional money may not be feeling chipper about CSCO’s prospects.
Primarily, options flow data for CSCO stock — which focuses exclusively on big block transactions likely placed by institutional investors — broadcasted a conspicuous mismatch. On Friday, net trade sentiment reached $227,700, favoring the bulls. At the same time, delta imbalance landed at $36,655 below parity, indicating that the actual positioning of major traders leaned bearishly.
It’s a confusing circumstance because the premium flow was notably optimistic. Stated differently, circumstances suggest that Wall Street’s alpha dogs are hopeful in upside for CSCO stock. Nevertheless, they’re also hedging for the possibility of downside.
Barchart Premier members enjoy access to detailed market intelligence, particularly in the breakdown of options flow transactions. Specifically, the biggest trades with bearish sentiment were for $62.50 puts with an expiration date of Sept. 19, 2025. Also, major players appeared to sell $60 calls with an April 17 expiration date.
Though the big dogs might be looking for upside, they’re also positioned to protect themselves if CSCO stock stumbles. Indeed, the charts suggest that the negative scenario isn’t entirely out of the question.
A Potentially Bearish Pattern in CSCO Stock May Warrant Caution
In a separate program I created, I scanned the stocks that comprise the Nasdaq-100 for commonly cited technical patterns. CSCO stock came up as a possible candidate for the bearish head and shoulders. This chart formation shows a distinctive peak between two humps, potentially signifying a fading out of upside momentum.
While I can’t say it’s a perfect match, beginning in January of this year, a pattern somewhat reminiscent of the head and shoulders has materialized. Combined with the latest options flow data — which shows smart money traders hedging for activity below $60 — investors should approach CSCO stock with caution.
Should the negative implications be proven correct, I see a real risk that Cisco shares could drop to their 200-day moving average. That would put the equity priced at around the $55 mark.
Adding to the concerns, the biggest transaction in terms of unusual options activity on Friday was for 5,293 contracts sold of the $57.50 call expiring April 17. Since the call sellers or writers would collect maximum premium if CSCO stock falls to or below the strike price at expiration, it lends credibility to the idea that the equity could drop to its 200 DMA.
Of course, the big risk with taking a bearish stance on Cisco is its upward bias. Using data over the past six years, a long position held for any given eight-week period has a nearly 57% chance of being profitable. When CSCO stock is riding a wave of modest momentum — defined as a weekly return of up to 5% — a subsequent eight-week hold has a nearly 59% chance of rising.
In some weeks following modest momentum, the odds of CSCO stock popping higher can be close to 64%. As stated earlier, you don’t want to bet against Cisco unless there’s a good reason to.
It’s not a guarantee. However, hedging behavior in the options market along with technical rumblings suggest that investors should be ultra-cautious.
A Bold Bet for the Aggressive Speculator
For those who want to throw caution to the wind, speculators may consider the 60/57.50 bear put spread for the options chain expiring April 17. This transaction involves buying the $60 put (at an ask of $129) and simultaneously selling the $57.50 put (for a bid of $41). The proceeds from the short put partially offset the debit paid for the long put, resulting in a net cash outlay of $88.
Should CSCO stock fall below the $57.50 short put strike at expiration, the trader collects the maximum reward of $162. That translates to a payout of over 184%.
Obviously, the reason why the payout is so high is that market makers don’t anticipate CSCO stock being volatile. Statistically, their skepticism is warranted. Still, with the smart money and technical patterns colluding, this might be the one instance where going against the numbers game might be prudent.
