All you ever read online is that John Chambers, CEO of Cisco, needs to be removed from his position. That Cisco is on the verge of destruction and Chambers isn’t prepared to take the company into emerging markets or able to mitigate competitor’s entry to the market.
But that kind of thinking simply isn’t fair to what Chambers has been able to do. Four straight years of growth and prosperous times, only to be nearly erased by them cutting expectations moving forward. Let’s not get too caught up on drama though, how should be play Cisco moving forward? I believe there are a large group of people who tax carving their positions out on Cisco, people who will later re-enter CSCO. With a P/E of 11.51, I see the upside to drastically outweigh the downside.
The LEAP options have a premium for the downside and for the upside are fairly cheap.
Straight up Call Buys:
The cost of a $20 Jan 2016 Call is $2.93, Net Price (minus the ITM): $1.81 / $21.12 = 8.6% net cost with another 5.3% on the table. Roughly 14%. Upside: Approximately Double up if it returns to around it’s 52-week high of $26.
The cost of a $22 Jan 2016 Call is $2.07, Net Price: $2.07 / $21.12 =9.8% net cost but 4.1% out of the money. Upside: Approximately Double up if it returns to around it’s 52-week high of $26.
Option #1 – If CSCO stays above $18 from now until Jan 15, 2016, 36.36% return.
Option #2 – If CSCO stays above $20 from now until Jan 15, 2016, 85.18% return.
I currently have no position in CSCO, I have sold at a loss for tax benefit purposes. I plan on buying back in after the wash rule clears.