Cisco Systems, Inc. (NASDAQ:CSCO) had a phenomenal 15% rally to start 2017. CSCO stock held well against the first dip in March, but it all came crashing down after its May earnings report. CSCO stock had an 11% correction overnight.
Cisco isn’t bloated, however. Its price-earnings ratio is almost half Microsoft Corporation’s (NASDAQ:MSFT), and CSCO stock offers a better dividend yield. Management boasts a solid balance sheet and is proven over decades. This is to say, the risk of Cisco stock falling for fundamental reasons is minimal.
Last night, the company reported earnings and Wall Street hated it. CSCO stock is now down 3.5%. The open interest hinted at the downside potential, but it also showed that there should be support for CSCO bulls. So as long as the equity markets in general remain healthy, CSCO stock will find footing, and therein lies the opportunity.
No, I am not calling for you to buy CSCO stock outright and pray for a rally. Instead, use CSCO options to create profits out of thin air. I’ve shared several trades that did just that this year and not all were bullish. So today, check your ego at the door and sell downside risk below support for a pretty penny.
Catching falling knives such as CSCO stock is easy when the company is a long-time proven success. Sell puts into this CSCO dip to create income for free at the risk of owning the shares lower.
I expect the area around $31.50 per share to be sticky. That’s why Cisco stock consistently fails to close the gap from its May downturn. Many a trader have bet wrong on the spike toward $33. During yesterday’s trading session it sure looked good for it, but to no avail.
Click to Enlarge I don’t expect CSCO stock will have a solid floor, but rather a support zone. I can accept a dip toward $30.25 without it changing my current outlook for the CSCO range. $30 per share also marks a long-term pivot area, which had served as resistance prior to July of 2016. Since then, it has been a solid floor.
Cisco is a proven survivor from the dot-com bubble. One report won’t derail the company.
My trade setup requires confidence in the long-term prospects for CSCO stock, and that I don’t mind temporarily owning CSCO shares should price move against my position.
CSCO Stock Options
The Bet: Sell the Jan 2018 CSCO stock $28 naked put and collect 60 cents to open. Here I have an 85% theoretical odds that price will stay above my strike. Otherwise I will suffer losses below $27.40. With a price-book of 2.5, it won’t be a major mistake owning shares in it.
Even though there is a 10%-plus margin of safety, some traders may want to mitigate the risk of selling naked puts. They can sell credit spreads instead, thereby limiting the maximum loss to the net width of the spread.
The Alternate Bet: Sell the Jan 2018 CSCO stock $28/$27 bull put spread. This spread has about the same chance of winning, but with much less at risk. Yet if successful, the spread will still yield 15%-plus. CSCO stock can fall another 10% and I will still win.
Investing in the stock market doesn’t come with guaranteed results, so I never risk more than I can afford to lose.
Learn how to generate income from options here. 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.
