Schaeffer's Midday Options Update Features Microsoft, Google, Cisco Systems, Johnson & Johnson, and Winnebago Industries.

CINCINNATI -- Today's Schaeffer's Midday Options Update features Microsoft (NASDAQ:MSFT), Google (NASDAQ:GOOG), Cisco Systems (NASDAQ:CSCO), Johnson & Johnson (NYSE:JNJ), and Winnebago Industries (NYSE:WGO). The Midday Options Update contains a brief commentary on the day's most notable activity and a table listing the most-active calls and puts for the day.

Options Update: Trading Optimism on Cisco Systems

After a negative start to the session following reports of an increasing U.S. trade gap rising import prices, a somewhat better-than-expected report on crude stockpiles lifted equities higher, only to see the major market indices edge back toward the breakeven mark shortly after. In the energy pits, the American Petroleum Institute said that crude inventories climbed by 7.2 million barrels last week, compared to an earlier report from the Energy Department that listed only a one million-barrel rise. Both organizations reported drops in gasoline inventories and distillate stocks.

In earlier economic news, the U.S. trade gap increased by 1.8 percent in August to $59 billion, matching Wall Street's estimate. The deficit with China widened to a record $18.5 billion. Elsewhere, the Labor Department reported that September import prices rose 2.3 percent, the largest increase we have seen in 15 years. Analysts had expected to see a figure of 0.9 percent. Excluding oil, import prices rose 1.2 percent. Finally, initial jobless claims fell by 2,000 to 389,000 in the latest week, according to the Labor Department said Thursday. The four-week average fell by 8,750 to 395,750.

Drug Wars

Shares of Johnson & Johnson (NYSE:JNJ) are on the march after the Dow component filed an anti-trust lawsuit against Amgen (AMGN), according to the The New York Times. The suit alleges that AMGN used illegal leverage by bundling sales of its products to force cancer clinics to use its Aranesp drug instead of JNJ's competing drug Procrit. JNJ was last seen up nearly three percent, while AMGN had advanced more than one percent.

It's a Winnebago...with Wings!

Or at least it had wings on the open. Winnebago Industries (NYSE:WGO) shares rose nearly three percent early in the session after the company reported fourth-quarter earnings of $15.4 million, or 46 cents per share. Revenue arrived at $231.5 million. The figures easily topped the estimate for a profit of 42 cents per share on revenue of $233 million. At last check, however, WGO was gliding in for a landing, trading up less than one percent.

Google Takes Aim at AOL 

A pair of suitors have emerged to challenge Microsoft (NASDAQ:MSFT) in its bid for Time Warner unit AOL. According to The Wall Street Journal, Google (NASDAQ:GOOG) and Comcast (CMCSA) are in advanced talks to acquire a minority stake in the Internet portal. The deal for the minority stake is valued at approximately $5 billion, but Reuters reported that the pair could make a bid for the entire AOL business, which is estimated at $10 billion. While CMCSA was approached by GOOG to partner in the deal, the Internet-search giant may still opt to make a bid on its own, according to sources. Meanwhile, talks with MSFT may be closer to striking a deal than the GOOG-CMCSA discussions, a source told Reuters. MSFT is attempting to increase its web presence by pairing its MSN Internet service with AOL.

Most-Active Options Update

At 1:19 p.m. eastern time, the Dow Jones Industrial Average (DJIA - 10,181.9) has declined 0.35 percent. The S&P 500 Index (SPX - 1,171.09) is down 0.56 percent, and the Nasdaq Composite (COMP - 2,034.0) has plunged 0.17 percent. At 1:20 p.m. Eastern time, 2,322,098 calls have changed hands compared to 2,497,200 puts, equaling a single-day put/call volume ratio of 1.07. The CBOE's equity put/call volume ratio weighed in at 1.31.

Cisco Systems

The Street's favorite networking company, Cisco Systems (NASDAQ:CSCO), is back on the Option Update most-active list today, not surprisingly due to some heavy call activity. The stock's October 17.50 strike has received the lion's share of attention, with more than 14,000 of these bullishly oriented options crossing the tape. However, with some 65,000 calls already in residence at this location, we will have to wait until tomorrow to discern how much of today's activity will translate into new open interest.

But the 17.50 strike is not the home to peak call open interest for the front three months of options, as that crown resides at the round-number 20 level. On the put side of the spectrum, the 17.50 region reigns supreme, but total put open interest for the front three months is easily dwarfed by the call open interest located at the October 17.50 strike.

Currently, CSCO is trading well below the 20 level, and has recently given up the support of the 17.50 area. Glancing at a daily chart, you would thing that CSCO has just been in a short-term downtrend since mid-July. However, a weekly chart reveals that this technical weakness extends all the way back to January 2004.

Furthermore, when comparing CSCO to its peers in the AMEX Networking Index (NWX), we find that the equity has been unable to keep pace as its relative-strength measure versus the NWX has declined since May. What's more, the NWX has underperformed the SPX since January 2004.

Turning to the sentiment outlook reveals a strong contrarian case for a bearish play. With the advent of heavy call activity in the options pits, the security's Schaeffer's put/call open interest ratio (SOIR) has plunged from its September 15 reading of 0.56 in the 70th percentile to its current perch at 0.47 in the 29th percentile. This decline is a clear indication of rising optimism from the group, which should raise some flags due to CSCO's poor technical picture.

Elsewhere, short sellers continue to shy away from the stock, as it would take slightly more than one session to cover the 53.9 million CSCO shares sold short, leaving the equity sorely lacking for short-covering support. Wall Street, meanwhile, continues its love affair with the nave of networking, as 17 of the 25 covering analysts rate the shares a "buy" or better, with the remaining eight doling out "holds."

But you don't have to delve into our indicators to get a feel for the bullish sentiment surrounding CSCO. All you have to do is check your local financial news stands. For example, CNN/Money recently featured a heavily optimistic article on the company with the title "Cisco: The Anti-Microsoft." Meanwhile, Barron's bullishly highlighted the entire networking sector in an article titled "The Trader." It is this type of optimistic hype amid the stock's poor technical performance that has earned CSCO a Schaeffer's Equity Scorecard rating of 3.0 out of 10.

Though it is a ways off, I thought that traders would also like to know that CSCO is slated to release its quarterly earnings report on November 9. Currently, the Street is expecting a profit of 24 cents per share. However, with all this optimism floating around, Whispernumber.com indicates that investors are expecting a profit of 25 cents per share. According to the website, this whisper number is derived from an average of individual investors' expectations regarding earnings for the most recent quarter. For comparison, CSCO's last report on August 8 saw the shares decline more than 10 percent during the ensuing five days after the company beat the Street's estimate by a penny, but missed the "whisper" number of 27 cents per share. Could we see a repeat this time around?

Click on the following link to access a Weekly Chart of CSCO since January 2004 with 10-Week and 20-Week Moving Averages: http://www.schaeffersresearch.com/commentary/observations.aspx?click= home&ID=14369. (Due to its length, this URL may need to be copied/pasted into your Internet browser's address field. Remove the extra space if one exists.)

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About Schaeffer's Investment Research (www.SchaeffersResearch.com)

Schaeffer's Investment Research, founded by Bernie Schaeffer in 1981, is a financial information and trading resources company. It publishes Bernie Schaeffer's Option Advisor, the nation's leading options subscription newsletter. The firm's contrarian approach focuses on stocks with technical and fundamental trends that run counter to investor expectations. The firm's website, http://www.SchaeffersResearch.com , is recognized as one of the leading information sources for stock and options traders and was cited as the top options website by both Forbes and Barron's. Click here for more details about Schaeffer's trading methodology: http://www.SchaeffersResearch.com/method .