Cisco Systems (NASDAQ:CSCO) stock had a great 2018 … until October, when Cisco stock started started falling along with other technology stocks. While high volatility in the broader market is likely to continue for several more weeks, there are two mildly bearish plays in CSCO stock that I want to share with you, as each play could lead to impressive profits.

Cisco, which is known for its networking hardware, such as routers and switches, has lately been diversifying into software and cloud support services. Many analysts and investors have welcomed this strategic move that is likely to add revenues, primarily from re-occurring cloud-related subscription services.

Year-to-date, the Cisco stock price, which had not rewarded investors much in recent years, is up over 15% despite the decline in the past two weeks.

Cisco stock made a new leg up in August and September, and the stock went from $40 to $49.50. The strong earnings report of Aug. 15 accelerated this price increase.  Over 30% of CSCO’s revenues came from subscription-based services, a number cheered by investors. The company also reported rising demand for its routers and networking switches.

As CSCO’s global geographical reach is rather broad, it is likely to escape the trade war with China with minimal damage to its revenues. The company is expecting to triple its customer base in India, where about two thirds of all small and medium enterprises (SMEs) have no online presence.

CSCO’s reserves of over $45 billion in cash and short-term investments enables it to be flexible, especially when it comes to potential acquisitions that may help the company increase revenue through software and subscription-based business. There are ongoing rumors that Cisco may eventually acquire Red Hat (NYSE:RHT), with which it has partnered for many years. In Aug. 2018, CSCO acquired a young start-up, Duo Security, to strengthen its offering of integrated cybersecurity products and solutions to customers, especially in multi-cloud computing and storage environments.

On Sept. 20, CSCO declared a quarterly stock dividend of 33 cents per share, payable on Oct. 24 to shareholders of record on Oct. 5. CSCO’s current annual average dividend yield of 2.7% makes it an attractive buy for dividend growth investors.

Despite the strength of Cisco’s balance sheet and the management’s strategic moves to increase the revenue base, the broad market selloff in October has also hit CSCO shares and the stock has given back over half of the recent move up. Cisco Systems will hold its next earnings conference call on Nov. 14.

Although Cisco stock may look quite appealing at this lower price from a fundamental basis, the volatility in the broader tech sector and the setback in CSCO shares are likely to continue for several more weeks. Cisco stock’s 52-week price range has been $33.17 (Oct. 12, 2017) to $49.14 (Oct. 1, 2018). Within the next two months, I expect Cisco stock to trade between $49 and $37.

Those investors who pay attention to moving averages and oscillators should note that the technical message has become a “sell.” CSCO shares will need to stabilize and build a base again before a long-term sustained leg up can occur. Short-term support for Cisco is first at $43.60 and then at $41; meanwhile, short-term resistance in BG stock is first at $45.90 and then at $48.

In the next few weeks, trading in CSCO stock is likely to be choppy, with both widely up and widely down days. However, up moves will probably be short-lived. Any up move today and possibly on Monday would offer investors better entry prices in the bearish trades below.

If you also believe that there might be more weakness in Cisco Systems stock both during the rest of the month and before its earnings call in November, here are the two trades set up for the stock (prices are based on CSCO stock’s closing price of $44.12 on Oct. 11):

Two Bearish Strategies on Cisco Systems Stock

1. If you already own Cisco stock, consider using a deep-in-the-money covered call to protect your portfolio. For every 100 shares of CSCO stock you own, sell a CSCO Dec $40 call option, which currently trades at $5.75. The $40 option is deep in-the-money (ITM), offering more downside protection in case of volatility and a further decline in CSCO stock.

This setup would offer you considerable stock protection; if you feel the weakness in CSCO stock will continue well into 2019 too, you can consider selling another in-the-money covered call at the expiry of this option.

This call option would stop trading on Dec. 21, 2018 and expire on Dec. 22.

Assuming you had entered this covered call trade at the closing prices on Thursday, at expiry the maximum return would be $163 (i.e., ($5.75 – ($44.12-$40))*100), excluding trading commissions and costs.

An covered call’s maximum profit is equal to the extrinsic value of the short call option. The trader realizes this gain as long as the price of CSCO stock at expiry remains above the strike price of the call option (i.e., $40).

2. Set up a bear call spread in Cisco stock based on CSCO’s closing price of $44.12 on Oct. 11, whereby you would purchase an out-of-the-money Cisco call option, while also selling the same number of at-the-money calls with the same expiration date. In other words, the strike price of the short (sold) CSCO call is below the strike of the long (bought) call.

While the short (sold) call generates income, the long call (bought) restricts the upside risk and sets a limit for the maximum loss the investor is willing to take. Traders use this strategy when they expect no meaningful upside in stock within a given period. The ideal case for the investor would be if Cisco stock traded sideways or went down moderately, while the investor keeps the position.

Therefore, as the first leg of the bear call spread, I would consider buying a CSCO Dec $49 call option, which currently trades at 56 cents. At the same time, for the second leg of the bear call spread, sell a CSCO Dec $44 call option, which currently trades at $2.79.

Your maximum return would be $223 at a price of $44 at expiry (excluding trading commissions and costs), which is the difference (or net credit) between the two option prices at trade initiation.

Your maximum risk would be equal to (high strike – low strike – net premium received) * 100. In other words, ($49-$44-$2.23) * 100 = $277, at a price of $49 at expiry (excluding trading commissions and costs).

You can close this options spread at any time before expiry.

The Bottom Line on Cisco Systems Stock

Although Cisco stock offers long-term investment opportunities on a strong fundamental basis, October and November may bring more volatility in technology stocks like CSCO. Through the use of various trade strategies involving options, investors will be able to weather the volatility that is likely to continue in the weeks to come and stability returns to the broader market.

As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.