Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

Playing CSCO bullish with put options

|Includes: Cisco Systems, Inc. (CSCO)

Wolf Option Trading posted an article about trading options on (NASDAQ:CSCO) to either earn income, or purchase shares at a discount.

Wolf points out support at $14 of late. Looking at CSCO I find a small dividend, which is not enough for me to go long on the shares. So, I'll use options because options reduce capital outlay. I find the company balance sheet quite good, with assets of $61b versus 38b of liabilities. [I adjust the assets downward to eliminate goodwill and so forth.] Also, cash flow is impressive.

Play #1: credit put spread.

STO* -1 CSCO Jan 19 2013 15.00 Put: $1.75
BTO* +1 CSCO Jan 19 2013 12.50 Put: ($0.89)

Net credit on the bid/ask per spread = $0.86
Margin is $250 per spread (difference between strike sold, and strike bought), less credit of $86 per spread, or $164
Break even = $14.14

Cost of any shares acquired = $14.14 each. The purchased 12.50 put is still active, and may be worth some money depending upon when the shares are assigned.

This is a very long play at 600 days. If never assigned, the net credit amounts to 31% earned on an annual basis, or 52% for the full 600 days. These percentages are figured upon the margin requirement. If assigned, you own (CSCO) at $14.14 per share. Since (CSCO) is trading for about $16.40 right now, this is quite a discount.

Play #2: naked put sale (or cash-secured put sale).

STO -1 CSCO Jan 19 2013 15.00 Put: $1.75

Net credit on the bid per contract = $1.75
Margin is $1500 per contract (the sold strike of $15), less credit of $175 per spread, or $1325
Break even = $13.25

Cost of any shares acquired is way down to $13.25 each. The bad part is that you could own the shares all the way down to zero, such as in a bankruptcy. I certainly do not expect anything so dire, but it is still possible. A more realistic losing senario would be a general market crash, and you wind-up buying CSCO for $13.25, when the going sale price is $11, or something else similar. Again, this is a long play at 600 days. If never assigned, the net credit amounts to 8% on an annual basis, or 13% for the full 600 days.

My decision was to employ Play #1, since that requires less margin and risk, and since it could well be more profitable should CSCO go on a nice bull run. However, on a downturn to just below $15, and not much more, selling the put naked would be better, since the net purchase price per share drops from $14.14, to $13.25. Knowing that, I'll still err on the side of safety, and higher returns should the stock price climb instead.

*Some options lingo:
BTO: Buy to Open
BTC: Buy to Close
STO: Sell to Open
STC: Sell to Close

ATM: strike price for a call or put that is nearest to current stock price (At the Money)
OTM: strike price for a call that is above the current stock price (Out of the Money); puts are similar but below the current stock price
ITM: strike price for a call that is below the current stock price (In the Money); puts are similar but above the current stock price
DITM: Deep in the Money

Disclosure: both long and short (CSCO) by use of options.