Cisco Systems Stock Is in a Trading Range - Good For Shorting Puts and Calls

Cisco Systems (CSCO) stock has been roughly flat for the past month. I suggested shorting OTM puts and calls in a June 19 Barchart article, which has worked well. It's time to repeat this play.

CSCO closed Monday, July 13, at $119.25. That's close to where it was on June 18 ($119.54). But since then, analysts have raised their price targets. That could help push CSCO higher next month when it reports earnings on August 12.

In my last article, I estimated a 12-month price target (PT) of $139.12. That was based on the company's strong free cash flow prospects. It hasn't changed much since then.

However, analysts have raised their PTs closer to mine. For example, Yahoo! Finance now shows that the average PT is $127.18, up from $126.05, and $117.95 a month before. And Barchart's mean survey PT is now $129.23.

Most of these analysts are not likely to change their outlook much until the next earnings release on Aug. 12.

This means that investors can probably make more money shorting out-of-the-money puts and calls over the next month.

Last Month's Options Plays Worked Well

I suggested shorting the $130 call and the $110 put options expiring this Friday, July 17, in my June 19 Barchart article, “Shorting Out-of-the-Money Cisco Puts and Calls Provides Shareholders Extra Income.”

At the time, CSCO closed at $119.54 on June 18, so both of these options were “out-of-the-money” - i.e., they were in no danger of being exercised. As a result, the short-seller collected both premiums and had little concern. 

The short-put premium was 1.23% (i.e., $1.35/$110.00), and the short-call yield (on a covered call basis) was 1.24% (i.e., $1.48/$119.54).

As of Monday, July 13, the put premium has fallen to just 18 cents and is still 7.76% out-of-the-money. The delta ratio is just -0.062, so it's likely to expire worthless, as hoped by the short-seller, by Friday. That makes this a successful short-put play over the last month.

Similarly, the $130.00 call short play premium is now down to just 11 cents (at the midpoint), with a low 4.40% delta ratio. It's also likely to expire worthless on Friday.

So, it makes sense now for an investor to close out the play (or let them expire unassigned on Friday), to short new one-month puts and calls.

New One-Month Puts and Calls Have Higher Yields

Look at the option period expiring August 14, 2026, a month away. The same strike prices have higher premiums and yields compared to last month.

For example, the $130.00 call option, 9.01% higher than Monday's close, has a midpoint premium of $3.43, compared to $1.48 last month. That gives covered call investors a one-month yield of 2.876%, or over twice last month's 1.24% yield:

   $3.43 / $119.25 = 0.02876 = 2.875% one-month covered call yield

Similarly, shorting $110 puts yields 2.90%, or over twice last month's 1.23% one-month yield:

  $3.19 / $110.00 =0.029 = 2.90% one-month secured cash put yield

This can be seen in the August 14 Barchart expiry table:

Note that the delta ratios are now much higher than last month. For example, the put delta is now 29.5% compared to 18.3% last month, as seen in my June 19 article. The call option delta ratio is now 31.58%, compared to 22.97% last month.

That implies higher variance and a higher probability that CSCO could hit either $110 or $130, compared to last month. Nevertheless, the ratios are not too high and still imply a nice yield for short investors.

The bottom line is that CSCO stock looks undervalued, and shorting OTM puts and calls is an attractive way to play the stock.