Last night, Cisco Systems, Inc. (NASDAQ:CSCO) reported earnings and investors quickly sold it down 4% on the headline. Management reported small beats on the top and bottom lines and they guided inline. These days, that is not enough. Investors want to be wowed, especially with the forward guidance. They didn’t get it so down CSCO stock went.
CSCO is a Dot Com survivor so it will take more than one tepid earnings report to knock it down for too long. It’s still in good company with other survivors like Intel Corporation (NASDAQ:INTC) and Oracle Corporation (NYSE:ORCL). These are dinosaurs of the old tech but who are adapting well to keep up with the young-uns like Nvidia Corporation (NASDAQ:NVDA).
This selling will eventually abate, especially if the equity markets stay strong. We now live in a world that is completely dependent on technology and there are only a few suppliers to it, so Cisco and all other will prosper for years to come. There will be dips like this, but those should be entry opportunities.
CSCO stock came into the earnings up 31% in a year, vastly outperforming the S&P 500, which was only up 13%, so the bulls are still happy about their returns even after a 5% earnings dip. But as exciting as that is, it still lags its competition. INTC and NVDA, for example, are up 52% and 80% respectively for the same period.
So, I am skeptical that the bulls will resume the rally for higher highs as fast as the others. But I am certain that Cisco stock will find footing sooner rather than later, and therein lies my opportunity. Quality stocks are a great way to generate income without any out-of-pocket expenses.
Instead of buying the CSCO shares and put $43 at risk with no room for error, I’d rather bet on downside support to hold. In essence I create income from selling lotto tickets to CSCO bears far below current price. If I am right then I create income from thin air. If I am wrong then I get to own shares at a deep discount from even here.
CSCO Stock Trade Ideas
The Bet: Sell the CSCO Sep $40 naked put and collect $1 to open. Here I have a 80% theoretical chance that I would retain maximum gains. But if the price falls below my strike then I own the shares and would suffer losses below $39.
Those who want to mitigate the risk that comes with selling naked puts can sell spreads instead.
The Alternate Bet: Sell the CSCO Sep $39/$37 credit put spread where my risk is limited. Yet if the spread wins would deliver 18% in yield.
It is important to note that today’s trade doesn’t need a rally to profit. I simply need support for CSCO stock to hold for the near term. Time will then do the heavy lifting and premiums will expire in my favor. But just in case, I have to be ready to own the shares at that level.
Click here for a more market coverage and get an ongoing free copy of my weekly newsletters.
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.