Only individuals who are bullish on Cisco Systems (CSCO) should consider employing this strategy. If you are not bullish on this stock, then it would be in your interest to look for alternative plays.
Investors should have a decent level of understanding in terms of how options work. If you do not have a good understand of how options work or cannot follow this strategy, etc., it would be best to take time to educate yourselves, as jumping into something you do not comprehend is asking for trouble. If you are looking for other ideas you might find this article to be of interest Energy Transfer Partners: A Great Long-Term Candidate?
Bullish strategy for Cisco systems
The strategy has two parts to it. In the first part we sell a put. In the second part we use the proceeds from the sale of the put to purchase calls.
The Jan 2013, 15 puts are trading in the 1.10-1.12 ranges. For this example we will assume that the puts can be sold for $1.11 or better. For each contract sold $111 dollars will be deposited into your account.
The Jan 2013, 19 calls are trading in the $0.22-0.24 ranges. For this example we will assume that we can purchase these calls for $0.23 or better. For each put sold you will be able to purchase up 4 calls and have a net credit of $19
Risks associated with this strategy
If the shares trade below the strike price, you sold the puts at, the shares could be assigned to your account. Depending on the number of calls you purchased your final price will range from $14.12 (if you purchased one call only) to $14.81 if you purchased four calls. As there is a chance that the shares could be assigned to your account, you need to be bullish on the prospects of this stock. If your outlook is not bullish, then you should not put this strategy into play.
You have the opportunity to leverage your position for free. If the stock takes off, your call could experience significant gains. Secondly, if the shares are assigned to your account, you will get in at a much lower price than if you decide to purchase them right now.
Company: Cisco Systems
- Levered free cash flow = $9.48 billion
- Sales vs 1 year ago = 7.9%
- 5 year sales growth = 4.9%
- EPS 5 year growth rate = 3.44%
- Operating margins = 22.6%
- Profit margin = 16%
- Beta = 1.46
- Short ratio= 1.50
- Operating cash flow = $11.23 Billion
- Quarterly revenue growth = 6.6%
- Quarterly earnings growth = 19.8%
- 5 year capital spending growth rate = -17.43
- Net Income ($mil) 12/2011 = 6490
- Net Income ($mil) 12/2010 = 7767
- Net Income ($mil) 12/2009 = 6134
- EBITDA ($mil) 12/2011 = 10939
- EBITDA ($mil) 12/2010 = 12068
- EBITDA ($mil) 12/2009 = 9807
- Cash Flow ($/share) 12/2011 = 1.87
- Cash Flow ($/share) 12/2010 = 1.79
- Cash Flow ($/share) 12/2009 = 1.49
- Sales ($mil) 12/2011 = 43218
- Sales ($mil) 12/2010 = 40040
- Sales ($mil) 12/2009 = 36117
- Annual EPS before NRI 12/2007 = 1.25
- Annual EPS before NRI 12/2008 = 1.43
- Annual EPS before NRI 12/2009 = 1.17
- Annual EPS before NRI 12/2010 = 1.4
- Annual EPS before NRI 12/2011 = 1.4
- Dividend Yield = 2.10
- Dividend Yield 5 Year Average = 0.3
- Payout Ratio = 0.19
- Payout Ratio 5 Year Average = 0.03
- Next 3-5 Year Estimate EPS Growth rate = 8
- 5 Year History EPS Growth = 2.37
- ROE 5 Year Average = 21.53
- Return on Investment = 12.96
- Debt/Total Cap 5 Year Average = 20.45
- Current Ratio = 3.6
- Current Ratio 5 Year Average = 2.93
- Quick Ratio = 3.30
- Cash Ratio = 2.92
- Interest Coverage = 16.5
- Retention rate = 81%
The charts are indicating that the markets could top toward the end of the summer. Moreover, the volume has been rather low and most companies are not too optimistic about the future. Even almighty Apple disappointed investors. Thus consider closing these positions toward the end of the summer or when and if the call options are showing gains in the 70%-100% ranges. To close the position out, you would sell the calls and purchase the puts back.
A major portion of the historical data used in this article was obtained from zacks.com. Options tables sourced from yahoofinance.com
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Disclaimer: It is imperative that you do your due diligence and then determine if the above strategy meets with your risk tolerance levels. The Latin maxim caveat emptor applies-let the buyer beware