Cisco Covered Calls Attractive, But Not Its Cash Secured Puts
Summary
- CSCO growth, profits stalled.
- Strong balance sheet could support a big acquisition.
- But 70% of big corporate acquisitions fail.
- Stock is fairly valued after nice run up. CSCO September covered calls look attractive. Cash secured puts don't offer attractive discounts for potential buyers of the stock.
By Donald E. L. Johnson
Speculator
North Post Research says Cisco (CSCO) should consider using its strong balance sheet to goose its growth with a big acquisition.
CSCO is fairly valued. Most potential acquisitions probably are over priced.
Huge acquisitions fail 70% of the time. Strong balance sheets hedge risks for shareholders, employees, suppliers and the company. See AAPL, BRK.A, MSFT, GOOG, etc.
Instead of making huge acquisitions, maybe CSCO should start investing in promising companies using the Warren Buffett model. Buy an insurer, play the float and invite Becky Quick to your annual meetings.
At this point, CSCO not only is fairly valued, its volatility also is so low that selling cash secured puts is relatively unattractive.
The time to sell cash secured puts is when a stock is moving higher and volatility is high enough to make selling puts attractive. While CSCO has been moving higher, the puts premiums aren't very attractive even when they're sold at the money. Selling puts is a bullish trade.
Speculators might buy CSCO at $59.42 with the idea that it might reach its estimated fair value of about $61 (StockRover.com, Valuentum.com). The could go for the short term gain and premium income by selling CSCO 9.17.21 $59.5 strike covered calls for about $0.35.
That would give them an annualized return on risk (RoR) of about 36%.
See my recent article about how I pick stocks for selling covered calls and cash secured puts.
While CSCO looks fairly priced, it probably is a low risk stock unless the markets drop sharply. Then it probably would sink with the markets.
CSCO is in the Dow Jones Industrials 30 index.
Analyst's Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours.
Beware. I'm an active private speculator who trades covered calls and sells puts on stocks for my accounts. I am not a professional analyst nor a financial advisor. I don't take and won't take responsibility for how other people trade. This article is for educational purposes only. I reserve the right to trade any of the listed stocks at any time. I own and/or have options on the following Dow stocks: BA, CAT, CVS, DOW, JNJ, VZ and WBA. I hold covered calls and cash secured puts on several of them.
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