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Pre-Earnings Bulls Descend Upon Ciena

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Meanwhile, one CIEN strategist constructs a bull call spread.

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As Ciena Corporation (NASDAQ:CIEN) prepares to report fiscal second-quarter earnings later this week, bullish speculators are zeroing in on the security today. Over 6,200 calls have crossed the tape thus far -- more than double the norm, and about triple the number of puts traded. Digging deeper into the data, it appears that one speculator is expecting the stock to rise over the next few weeks, but has trimmed his cost of entry by employing a bull call spread.

More specifically, a block of 2,000 calls was purchased at the June 17 strike near an ask price of $0.73 each, while an equal number of calls was simultaneously sold at the June 20 strike for $0.11 apiece. This resulted in a net debit of $0.62 per pair of contracts. In this scenario, the trader is betting on CIEN to surmount the breakeven rail of $17.62 (bought strike price plus the net debit) by front-month expiration, but not so far north that he would have been better off simply buying a "vanilla" call on the equity. On that note, his maximum profit is limited to $2.38 (difference between strike prices less the net debit), no matter how far CIEN should soar north of $20, while his potential risk is capped at the net debit paid.

This campaign for calls over puts is more of the same for the networking equipment provider. CIEN's 10-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) call/put volume ratio sits at 4.66, confirming traders have bought to open more than four calls for every put during the past two weeks. This ratio ranks higher than 77% of comparable annual readings, meaning speculators have been buying calls versus puts at an accelerated clip lately.

As a result, Schaeffer's put/call open interest ratio (SOIR) for CIEN checks in at 0.61, with calls easily outstripping puts among options slated to expire within the next three months. In fact, this ratio hovers just 8 percentage points above a yearly nadir, indicating short-term traders have rarely been more call-heavy toward the equity during the past year.

Technically, Ciena Corporation has tacked on just 3.6% year-to-date, but has bested the broader S&P 500 Index (INDEXSP:.INX) by roughly 13 percentage points during the past four weeks. Meanwhile, the stock finished May atop its 10-month moving average, which has served as firm support since November.

As alluded to earlier, the firm is due to reveal quarterly earnings before this Thursday's opening bell, and has had a mixed history in the earnings confessional, besting consensus estimates in two of the past four quarters. However, the stock has traded an average of 3.4% higher the day after posting, and around 4.3% higher a week later. For the current quarter, analysts are expecting a loss of 1 cent per share.

At last check, CIEN is off 2.8% to hover at $16.26.

This article by Terri Stridsberg was originally published on Schaeffer's Investment Research.

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No positions in stocks mentioned.
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