You Didn’t Miss the Rally. Go Long Cisco Systems, Inc. Stock for Free.

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On the worst week that Wall Street has seen in a while, Cisco Systems, Inc. (NASDAQ:CSCO) is a breath of fresh air. The company reported earnings last night and CSCO stock is rising 6% on the headline.

You Didn't Miss the Rally. Go Long Cisco Systems, Inc. Stock for Free.

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Political worries over the corporate tax issue made for a jittery week on Wall Street. We had several retests of recent support so this positive reaction in CSCO is a welcome relief to bulls.

Management delivered a beat against expectations and inched up the guidance ever so slightly. But investors are happy it’s not a guide lower. Besides, the report had no hair on it, meaning there was nothing obvious for the bears to nitpick. It’s good for CSCO to not have one pivot point that everyone is looking for so that the event is not so binary in nature.

Why CSCO Stock Is Worth a Look

Fundamentally, it is cheap with a price-to-earnings ratio of 18 and a price-to-book ratio of 2.5. I know that it won’t be a major mistake owning the shares at a discount in a worst case scenario. So today I want to go long CSCO stock, but given that it’s rallying, I’d like to dial back the clock to see if I can buy it cheaper.


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To do that, I want to use options instead of buying the shares outright. In doing this, I can sell puts lower at a level that I would like to own it and I’d wait. If it falls to it, then I get my wish. Otherwise I would have created income from nothing by merely betting bullish on a winner that is Cisco stock.

Technically, while it’s far from its all time high, this breakout here should have legs. The stock came to it from higher lows knocking on a roof. When they break through the roof, the bulls usually overshoot. A measured move should have it reach for $40. Regardless, how high it goes is irrelevant to my trade since I profit from the support.

Expectations on Wall Street are not too stretched so it’s likely that there will be upgrades from analysts. CSCO stock is just now trading above the average price target and it still has room to the upper end of the range.

There was a clear price reset near $30-per-share-level and therein lies my opportunity.

The Trade: Sell the CSCO Jun 2018 $30 naked put. This is a bullish trade for which I collect 50 cents to open. I have an 80% certainty that I will retain maximum gains. But if the price falls below my strike, then I own shares. I would then need to manage off my breakeven point of $29.50.

Selling naked puts carries sizeable risk, especially in markets that are near all time highs. For those who want to mitigate it, they can sell a spread instead.

The Alternate Trade: Sell the Jun 2018 CSCO $31/$29 credit put spread. Here, I have about the same odds of success, but the risk is smaller and the reward still remains as high as 12% in yield.

Ultimately, regardless of how careful I am, investing in stocks is fraught with danger, so I never risk more than I am willing to lose

Get my newsletter for free 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 as @racernic on twitter and stocktwits.

Nicolas Chahine is the managing director of SellSpreads.com.


Article printed from InvestorPlace Media, https://investorplace.com/2017/11/go-long-cisco-systems-inc-stock-for-free/.

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