Cisco Systems, Inc. (NASDAQ:CSCO) has had an exciting start to 2017. It rallied 15%, then gave most of it back. Now it’s clawing its way back, perhaps trying to fill the giant gap to $33 per share.
CSCO is a proven survivor. Management doesn’t give Wall Street too many reasons to short its stock. So the recent drop in opinion presents an opportunity.
Click to Enlarge ÃÛÌÒ´«Ã½s are near all-time highs, so I prefer to not risk money buying stocks. Instead, I prefer to incorporate buffer zones between the current price and my risk.
My idea of selling risk is simple: If I like Cisco stock here, then I would like it even better 12% lower. Fundamentally, the stock is cheap relative to its competitors. It carries a low price-to-earnings ratio and a very humble price to book. So I could say it has shed whatever fluff it may have had above $34.
Furthermore, analyst expectations are not excessive. Meaning their ratings are spread evenly about the top three ratings.
CSCO Stock Trade Idea
The Thesis: If CSCO stock falls 13%, I am willing to own it. So I will sell downside risk against my level to generate income. I do this so I don’t need to chase a price target. I can profit even if price falls through November as long as price stays above my strike.
On May 8, the price bumped against a repeat support level. This makes it important to hold. Otherwise, if bulls lose it, bears could gain momentum to retest $29.
The Trade:
Sell the CSCO Nov $28 naked put and collect 50 cents per contract. Here I have a 90% theoretical certainty that I will retain my maximum gains. Otherwise if the stock falls below $28, then I own the shares and would accrue losses below $27.50.
Selling naked puts is not for everyone, and for those who prefer more tepid risk I can use spreads instead.
The Alternate: Sell CSCO $28/$27 credit put spread where I have the same chances of success but with more limited risk. But the compromise is not that big since the spread can still deliver 15% yield. Compare this with risking $32 per share without any room for error then hoping that CSCO stock rallies 15% just to match the performance of the spread.
Learn how to generate income from options . Nicolas Chahine is the managing director of . As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at and stocktwits at .
