One-time NASDAQ mover and shaker, network communications equipment provider Ciena (CIEN), reports before the bell Wednesday morning. Analysts expect the company to show a loss of -$0.33 compared to last year’s slighter profit pinch of just -$0.05 per share. But, despite the scare factor involved with larger looming losses, in front of tomorrow’s release option bulls looked to be “calling on Ciena” and putting their best foot optimistically forward.
During Tuesday’s session CIEN saw a near four-fold increase in option activity on volume of about 62,000 with primary interest in the calls by a four-to-one margin. With implieds jumping handily to multi-month highs in the front month and firming in the back months, we can make the basic assumption of bullish call buyers dictating the order flow. 
Figure 1: Ciena (CIEN) ATM IV Graph
Analysis of Ciena’s statistical volatility also reveals bulls were rather aggressive compared to the stock’s underlying volatility. September at-the-money premiums priced around 70% IV is above both short and longer-term movement of CIEN shares by 63% to 119%.
Most active on the session by a sizable margin, the out-of-the money September 14 call saw a bit more than 19,000 contracts change hands. With much smaller open interest of 5,600, the well-bid but dollar cheap contract priced at $0.40 will need to see a move of roughly 10% to the upside in order for call buyers to realize a double or $0.80 market price at expiration. 
Figure 2: Ciena (CIEN) Sept 14 Call Risk Graph
Bullish movement immediately following the report will help long call holders somewhat but not entirely. Those traders will have to overcome an implied volatility crush due to the nature of the rich pricing. I’ve estimated implieds could fall 33% from around 70% IV into the high 40s. If shares were unchanged tomorrow, by days close the price for those calls would be cut in half. Shown in Figure 2 is an illustrated 10 lot September 14 call risk graph accounting for the stated drop in implieds.
Of course or as should be realized, buyers of Ciena’s front month premium in general are at risk. With shares at 13.43, the ATM September 13 / 14 strangle is priced for $0.83 with breakevens of 12.17 and 14.83 at expiration. Theoretically, with nine days left until expiration, 70% IV means traders expect a 68% or 1SD chance CIEN shares will remain within 11% of tonight’s closing price. To this trader, that intuitively sounds like a tough hurdle for premium bulls to clear.
Figure 3: Ciena (CIEN) Weekly Chart
Looking above and eyeballing the weekly chart, shares of CIEN as denoted by the “E” for earnings have often enough moved more than the 10% to 11% priced in by the strangle during the five-day period that it announces its results. That’s counter to my own gut reaction. However, on a close-to-close weekly basis, the underlying move in shares is a bit more tempered and likely problematic for less aggressive long premium plays that overstay their welcome when the getting is good.
Time of course will tell what Wednesday and the next several sessions bring about this time around. Personally though, in appreciating some of today’s fervor for calls without the potential headache of expensive pricing and while having an eye on potential support for a weekly uptrend—I’d rather look at bull verticals and calendars when calling on Ciena.
Chris Tyler
Senior Staff Writer & Options Strategist
Optionetics.com ~ Your Options Education Site
Visit Chris Tyler’s Forum
The information offered here is based upon Christopher Tyler’s observations and strictly intended for educational purposes only, the use of which is the responsibility of the individual.
