OK, so you can’t go back in time to buy shares of Cisco Systems Inc. (NASDAQ: CSCO) under $25 as you very briefly had the chance to on Thursday and Friday. But with earnings scheduled to be announced Wednesday after the closing bell, and after seeing the market whip around and the CBOE Volatility Index (VIX) almost double, it is worth looking at CSCO options to see where a trade lies.
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Buying call options in the May and June strikes either looks too expensive or the stock has to rise too much following the monster move it already made. So, let’s look at writing naked puts.
One strategy for a “chicken-bull” is to look at selling put options with some time value after the earnings event to create a synthetic purchase price lower than the price today.
At $26.34 today, Cisco’s 52-week range is $17.61 to $27.74. Here was the low of each of the last four trading sessions, followed by the close on each day:
- Monday, May 10: $25.90 low, $26.13 close
- Friday, May 7: $24.33 low, $24.71 close
- Thursday, May 6: $23.23 low, $25.49 close
- Wednesday, May 5: $26.15 low, $26.55 close
Based on where Cisco was trading before the “flash crash,” being able to go back in time to buy Cisco under $25 might seem like a gift. Well, writing the put option gives you earned premium rather than just setting a limit order under $25.
The less aggressive position is to sell the CSCO May 25 Puts (CSCO 100522P00025000) at 29 cents. If Cisco drops under $25, you effectively own shares at $24.71.
If you want a larger premium for one more month’s worth of time value, then the CSCO June 25 Puts (CSCO 100619P00025000) will generate 64 cents in premium. The June option would effectively give you a cost basis of $24.36 if the stock gets put to you.
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