This morning, stocks are bouncing partly due to a stellar report from Cisco (NASDAQ:CSCO). Management delivered a beat on both the top- and bottom-lines. More importantly, they raised forward guidance. Wall Street is rewarding CSCO stock accordingly.
But I think it’s the tone management had that is the more comforting aspect of this earnings report. CSCO leadership is confident not only in their own execution on plans, but also in the environment in which they operate.
This is a statement about a healthy economy and challenges those who think that the trade wars will lead investors to their doom.
CSCO stock is a surviving dinosaur from the DotCom bubble burst. It is a giant and so far, there is good evidence that it is successfully making the shift into the new tech world that revolves around the cloud and services, rather than just hardware sales.
This earnings report presents strong evidence that it is succeeding in carving its niche. Management clearly stated their strategy is working, as they noted they were not concerned about potential tariff war headwinds. This is confidence against which I can sell risk for income with peace of mind.
I was lucky enough to be holding calls into the earnings report. But instead of chasing upside hopium from here, I set up this trade to profit from proven CSCO stock support. This means, I am not risking $46 to buy the shares outright without any room for error.
How to Trade CSCO Stock Today
I believe the stock market will be healthy for the remainder of 2018 and a bear thesis is thin without inflammatory headlines. This makes me confident in selling downside risk into Cisco stock for income.
This way, I can retain maximum gains, even if CSCO stock falls 15% from current levels. Worst case scenario, I get the opportunity to own a quality company like Cisco at a bargain price. In the long run, I am confident that I would be able to manage out of it for profits.
The Trade: Sell the CSCO Jan 2019 $40 put and collect 80-cents-per-contract to open. I have a 83% theoretical certainty that I retain maximum gains with this trade. Otherwise, I will accumulate losses below $39.20.
Those who want to mitigate the risk that comes with selling naked puts can sell spreads instead.
The Alternate Trade: Sell the CSCO Jan 2019 $40/$38 credit put spread, where there is about the same odds of winning but with much less risk. Only, the spread would yield 15% if successful.
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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.
