Trade Alert: The Backbone’s Connected to Cisco
Cisco Systems’ (NSDQ: CSCO) experience yesterday is perfectly emblematic of an earnings season where beating forecasts and offering forward guidance that meets estimates are no longer good enough.
The market demanded even more. So the stock ended the day down nearly 4%.
But that shortsighted selloff gives us an opportunity to do a trade on an otherwise solid company whose core switches and routers businesses help form the backbone of the Internet.
Now that earnings are out of the way, we’re able to do a trade with a contract that expires well before the company is expected to report next. It’s never a bad thing if the timing of a short-term trade can eliminate the possibility of any earnings-related surprises, especially since right now the market can’t even handle good news, at best.
This trade will generate immediate income of at least $40 per contract now, with the possibility of buying Cisco at a 7.5% discount to where it currently trades if the stock gets put to you. Investors should set aside $4,000 per contract sold to buy the stock in case the option expires in the money.
Regardless of how many contracts you sell, it’s absolutely critical that you follow the instructions below, particularly when it comes to setting the limit order.
How to Make the Trade:
- Trade: Sell to open the July 20, 2018, $40 Put on CSCO.
- Allocation: Sell one put for every 100 shares you would be pleased to buy at $40 per share.
- Current Stock Price: $43.26
- Limit Order Price: a credit of $0.40 or more.
- Tell your broker: “I want to sell a put on Cisco Systems (NSDQ: CSCO) stock. Specifically, I want to ‘sell to open’ one July $40 Put for a credit of $0.40 per share or more.”
- Further Instructions Regarding the Trade:
- If the option price changes, you can adjust our recommended limit based on the midpoint of the bid/ask spread, which you should be able to see when entering the trade. Just make sure the potential credit is at least $0.40 per share or more.
- Place your limit order on a “good ‘til canceled” (GTC) basis and be patient.
The Win-Win Situation:
For every put contract you sell, you will collect $40 that’s yours to keep no matter what happens in the future.
If the put expires worthless, meaning the stock price is above $40 per share at expiration, then we’ll do another trade to create another instant payment.
If the stock is trading at or below the strike price upon the contract’s expiration, then you’ll be buying Cisco at a 7.5% discount to the current market price, while locking in a yield of 3.1%—plus the premium you pocketed when you sold the put.
Then we’ll collect the dividend while creating more instant payments by selling covered calls against the stock.