Cisco Systems, Inc. (NASDAQ: CSCO) and other tech stocks are trading higher today after competitor IBM (NYSE: IBM) indicated in a preliminary earnings report that its fourth-quarter earnings rose 24% from a year ago to $2.80 per share, beating Wall Street expectations of $2.60 per share. IBM said that the weak dollar contributed to higher revenue for the quarter. Tech stocks are rising on the whole as investors get their hopes up that others might see the same lift from international sales. If you think that the company won't fall by too much in the coming months, then now could be a good time to look at a bullish hedged trade on CSCO.After hitting a one-year low of $24.82 in March, the stock hit a one-year high of $34.24 in November. CSCO opened this morning at $26.59. So far today the stock has hit a low of $26.20 and a high of $26.67. As of 10:45, CSCO is trading at $26.46, up %0.59 (2.3%). The chart for CSCO looks bearish but improving, while S&P gives the stock a neutral 3 STARS (out of 5) hold rating.
For a bullish hedged play on this stock, I would consider a February bull-put credit spread below the $22.50 range. A bull-put credit spread is an options position that combines the purchase and sale of put options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. This particular trade will make a 4.2% return in just 5 weeks as long as CSCO is above $22.50 at February expiration. Cisco would have to fall by more than 15% before we would start to lose money.
CSCO hasn't been below $24.80 at all in the past year and has shown support around $25.50 recently. This trade could be risky if the tech sector is pulled downward by continued economic weakness, but even if that happens, this position could be protected by the support the stock might find around 25, where CSCO has bottomed many times over the past year.
Brent Archer is an options analyst and writer at Investors Observer. At publication time, Brent neither owns nor controls positions in CSCO or IBM.
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