Cisco Systems Options Strategy Outperforms Stock Ahead of Earnings
Analysts raise price targets as Cisco prepares for fiscal fourth-quarter results, with structured options trades offering superior capital efficiency compared to holding shares.
Cisco Systems is scheduled to report its fiscal fourth-quarter earnings after market close on 12 August, with analysts increasingly bullish on the networking giant’s prospects. The mean analyst survey price target has risen to approximately $131.32, while Yahoo Finance data places the consensus target near $132.59. This upward revision comes as the stock trades in a narrow range, closing at $121.43 on 7 August, a level not significantly different from its price two months prior.
Market analysis suggests that shorting one-month out-of-the-money puts and calls has generated higher returns than holding the underlying stock. According to data from Barchart, a strategy involving short positions in the 14 August expiry $130 call and $110 put generated a total return of $4.61. This compares favourably to the $2.18 rise in Cisco’s share price over the same three-week period, effectively doubling the return on the stock’s appreciation.
The capital efficiency of this options strategy is notable. To execute the trade, an investor would require $22,925 in capital, comprising $11,925 for the covered call and $11,000 in collateral for the cash-secured put. This yielded a 2.01% return on capital over three weeks, which annualises to an expected return of 34.84%. This figure significantly outpaces the 1.828% gain Cisco shares delivered during the same timeframe.
Looking ahead to the 11 September expiry, the strategy projects a total expected return of 2.438% over one month. The covered call yield on the $134 strike is 2.37%, while the cash-secured put yield on the $112 strike is 2.509%. The total capital required for this subsequent trade is $23,343, which is fully covered by the $23,386 returned from the previous position, allowing for continuous reinvestment without additional external funding.
For value investors, the potential assignment of the September put offers an attractive entry point. If assigned at $112.00, the expected total return, including the income yield and the analyst price target of $131.22, stands at 19.60%. While investors can mitigate downside risk by purchasing further out-of-the-money options, the worst-case scenarios involve selling shares at a profit or acquiring stock at a discount to current analyst valuations.
