8:00pm (EST)

Cisco Systems (CSCO, $18.72, up $0.80) had a super day as it added nearly 5% and closed near its high on Monday. I had talked about buying the stock and writing a covered call against the shares in the Weekly Wrap which would have lowered your cost basis.

The stock opened at $18.15 and if you waited a little after the opening bell, it fell to a low of $18.06. Let’s say you got in at $18.15. A 100 shares would have cost $1,815 and if you had sold one July 19 call (CYQGA, $0.88, up $0.30) you would have received about $65 as the calls opened at 61 cents.

This lowers your cost basis in the stock to $1,750 ($1,815 – $65) but you are now obligated to sell the stock at $19 if the option is exercised by July 17th. In other words, your gains are capped should Cisco run past $20.

Still, if the stock is “called” away from you at $19 your profit would be 9% for 2 months (or sooner) worth of work. The good news is that the option wouldn’t be called away immediately unless the stock hits $19.65 which is the other guy’s breakeven point. However, if the stock is at $19.10 or anything over $19, realize the option can be exercised at any time.

One of the disadvantages of doing this strategy is if Cisco runs to $22 then the July 19 calls would be worth at least $3 which would have been a 200% profit if you had just bought the call options straight-up.

Tech started off the week hot and if Cisco sneezes it might break $19 this week…

Rick Rouse
Rick@OptionsMentoring.com