This year has been kind to Cisco Systems, Inc. (NASDAQ:CSCO) stock, which has risen all the way back to 2007 levels. If I zoom out, the monthly chart shows more upside potential relative to all-time highs, but on the daily chart, CSCO stock looks extended.
Fundamentally, Cisco is a solid mega-cap stock, and with the world becoming more digitally dependent, it should prosper for years to come. Shorting Cisco stock now would be more of a proxy short to the equity markets in general.
This is a potentially pivotal week for markets. Among other things, such as the Brexit and “TrumpCare,” the Federal Reserve is expected to raise interest rates. Wall Street isn’t showing much fear yet, though, as markets are plowing into record territory in the face of tremendous uncertainty.
Because of this so-called animal spirit,the long trade has been the easier one to take.
Today, I want to short CSCO stock. Before you send out for my arrest, though, understand that I’m not short on the company’s prospects. In fact, this pair trade is an affirmation of the longer-term potential in Cisco.
What’s even better is that the trade will be free. I plan to finance a debit put spread by selling risk against the perceived value of Cisco Systems.
These are levels where CSCO buyers would defend the stock in times of trouble.
How to Trade CSCO Stock Right Now
The Bet: Buy the CSCO April $35/$34 debit put spread for 30 cents per contract. This is my maximum potential loss for the chance to double my money. This is a bearish spread where I need Cisco to fall through the $34 strike by mid-April.
Since I don’t have a specific fundamental reason to short CSCO stock, I want to hedge it. So I’m going to lower my out-of-pocket risk by selling downside risk.
The trick is to find levels where I think Cisco buyers would support the stock in times of trouble.
The Hedge (Optional): Sell a CSCO Oct $28 put for 55 cents per contract. This would more than completely finance my bearish bet, but do so with zero out-of-pocket expense. However, buy selling the put, I do commit to buying Cisco shares at $28 if they fall below there.
Taking both trades results in a net credit into my account. So I would be profitable as long as CSCO stock stays above $28 per share. Furthermore, any premium I recapture from selling the debit spread would be additional profits. So instead of chasing a price with this pair trade, I have an opportunity to profit almost regardless.
I am not required to hold my positions open through expiration. I can close them at anytime for partial gains or losses.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @racernic and stocktwits at @racernic.
