Earnings season is always an interesting time to be an options trader because there are so many additional factors to consider when making trading decisions. That is certainly the case with our Cisco Systems (NASDAQ:CSCO) position.
We have been the proud owners of CSCO shares since August, when the shares were put to us after the put write we sold against the stock expired in the money. We’ve already sold one profitable covered call against our shares, and now that CSCO is bouncing up off support at $46, it’s time to sell another.
Collecting While we Wait
This is a great time to sell covered calls because implied volatility levels are high thanks to the uncertainty that permeates every earnings season. You see, when uncertainty about where a stock may move in the future increases, implied volatility levels rise. Higher implied volatility levels mean higher option premiums, which is great for us as options sellers.
However, CSCO is scheduled to report quarterly earnings on Nov. 13, after market close, and we don’t want to have our shares of CSCO called away from us if the company has a better-than-expected earnings announcement. So how should we handle that?
The simple answer is by selling a covered call that will expire before Nov. 13. Because we purchased the stock at $56 per share, we’re looking for an expiration that still offers a good premium but doesn’t put us at risk of having the stock called away. We want to continue collecting income on the stock while we wait for a recovery.
Consolidating Until Further Notice
As mentioned above, CSCO recently bounced off support at $46, but we don’t think it will rise without some external stimulation. After a downgrade from Goldman Sachs, the stock took a significant hit. Its cheaper price might be appealing, but investors might be just as inclined to wait for some bullish signs before entering the stock.
In the chart below, you can see that the $49 level acted as resistance in mid-August. Then in late September, it acted as support. Now that the $49 support level has collapsed again, we think it will act as a strong barrier if CSCO rises.
Daily Chart of Cisco Systems, Inc. (CSCO) — Chart Source: TradingView
Ultimately, we think a strong earnings report could push CSCO higher, and we don’t mind holding on to the stock while we wait. However, we would like to collect some income ahead of the company’s earnings report.
Setting the strike for $49 helps us ensure we aren’t called out of the stock, since that level will be hard for CSCO to overcome. With an early November expiration, this isn’t going to be our most lucrative trade ever. But we think it’s better to squeeze some additional income out of these shares than to just let them sit uncovered.
To find out which CSCO covered calls we’re selling—and to get access to our full portfolio of income-generating trades—sign up for a risk-free trial of Strategic Trader today.
InvestorPlace advisers John Jagerson and S. Wade Hansen, both Chartered Market Technician (CMT) designees, are co-founders of LearningMarkets.com, as well as the co-editors of Strategic Trader.
