By Warren Kaplan
The Stock Option Writer
© Warren Kaplan 2011-2012
January 10, 2012
Cisco Systems, Inc (CSCO) looks like a technology stock on a comeback trail. The shares are in the Dow-Jones Averages. However, that is not a guarantee on anything as witness the shareholder wipeout of General Motors.
Still, the company seems to be recovering from earlier lower forecasts and business problems. It currently pays a dividend too, unlike Apple Inc. Cisco pays 24¢ a year and based on a price of $18.85, the annual yield is 1.27%. Before deciding if you should get involved with this company, I urge you to review the stock with your financial advisor to see if it fits into your portfolio.
That all said, let’s see how to make money on this puppy. First, IF you were buying the stock at say $18.85, what price would you want to sell it at and in what period of time? This is a common problem with all investors. They have no objective hence; many of them lose money as they panic.
If you would be satisfied with gaining say 33% within one year, well then, look to sell the October 20, 2012, $25.00 call, which currently brings 27¢ a share. Not including the dividends, if the stock gets called away, the approximate annualized yield is actually around 39.6%. This yield does not include the dividends that you will receive. You can get a premium of 47¢ if you sell the January 19, 2013 call at $25.00. The 47¢ reduces your cost to $18.38 and if the stock is called away at $25.00, your gain is 36.01% plus you will have gotten dividends for one year, which should be no less than the current 24¢ but will likely be more. It is possible that the stock will sell at a higher price than $25.00 during the year; it is possible that the stock will not be called away from you. If the stock ends the time period still in your possession and is below $25.00, you will continue to own the shares. The premium you received reduces your cost and you can sell a fresh call option on the stock at a higher or lower or the same price. Even now, you can sell a call option expiring January 18, 2014. The $25.00 strike price would bring you $1.25 thereby reducing your cost from $18.85 to $17.60. If the stock gets called away after 2 years, your yield is 42.05% and the annual yield is 21.02%. This is really not bad considering that current money market yields are less than .10%. You will also get 2-years of dividends, which would give you a current yield of 1.36% (you only had to layout $17.60 to get the current 24¢ dividend). Of course in 2-years the stock price could go materially higher than the $25.00 but you should never count other people’s profits. You have to decide if you are satisfied with your 42.05% profit. If you are very bullish on CSCO, you can sell the January 18, 2014 $30.00 call for 50¢ and be sitting on a potential profit of $11.65 on an investment of $18.35 ($18.85 – $.50 premium you get for selling the call). IF it works, you will make 63.49% in 2-years, a very nice 31.74% return. The shorter the time period, the greater your yield but the less the premium will be. You can wait to see if the stock will go down and try to buy it at say $18.50 instead of $18.85 and if the stock rises back to the $18.85 price very soon, you should get the premiums that I have indicated. Actually, the higher the stock price goes, the more premium you will get. Ex-dividend dates are early January, April, July and October.
Warren Kaplan has been writing options for 50 years. He has been a stockbroker, investment banker and brokerage owner. He currently owns and operates Kaplan Asset Management, a provider of financial assistance for small to middle market businesses. He has more than a half-century of experience in dealing with financial markets, giving guidance and consulting with management, and assisting in the development of business strategies and solutions. The Company has assisted and consulted many successful companies, such as Natures Bounty (NBTY) and Action Products International (APII), helping them to go public and trade on the NASDAQ stock exchange. His philosophy is to “do something with the profits.” “If you make $100 in the stock market, take 50 percent and invest it back into the market. Then, take the other 50 percent and buy yourself something.”
Reader’s comments are welcome. Please do not consider these opinions as advice and we take no responsibility for any trades made. You should review these option writing ideas with your financial advisor so that you are properly guided. Writing options is not for everyone. If you want information about a certain stock, please email corp@opportunistmagazine.com.
