The Money Tree

Safely Generating Income in Retirement

New Trades – CSCO

Posted by mounddweller on October 28, 2012

Fellow Traders,

I know it’s been a couple weeks since my last post.  I’ve really fallen down on the job lately when it comes to keeping The Money Tree current.  So today I want to catch you up on a couple trades I’ve made.

First up is CSCO.  On October 19th  I executed two NP trades.

(1)  STO 5 NOV $17 at $0.33

(2)  STO 5 DEC $16 at $0.24

In both cases CSCO was trading at $18.12 when my trades were executed.

So, why CSCO and why now?  I think CSCO represents a great value.  It trades at <12x trailing earnings and <9x expected earnings.  It has $32B in net cash ($6.13/share).  That’s over 33% of its market value.  Subtract out the net cash/share from the Friday closing price of $17.29 and you’ll see CSCO is trading at 5.34x prospective earnings.  This for a company that generates over $8B per year in free cash flow and has a dividend yield of 3.24%!  CSCO is undoubtedly the Rodney Dangerfield of the stock market; it gets NO RESPECT!

So, that is why I decided to execute the two trades I did.  I would be happy to own CSCO at between $16 and $17 per share.

So, what is my strategy?  Well, if my NOV $17 expire OTM I will rewrite another round of puts at either the $17 or $16 strike with a JAN expiration.   If the puts are ITM as expiration approaches I will roll them out and possibly down depending on price and work to build up my net credit.  If the DEC $16 puts expire OTM I will enter a new trade and do a buy/write in an attempt to capture the dividend in the first week of January.    If CSCO is less than $16 at DEC expiration I will accept assignment and then look to sell covered calls against those newly acquired shares.

My overall objective is to begin building a long-term position in CSCO, reinvesting the dividends until I retire.  At retirement the dividends will form part of my income stream.




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