Last night Cisco(CSCO) beat expected earnings, but after warning of weakness in their conference call, the stock is getting hammered today. I'm going to take advantage of the weakness to sell some uncovered puts on CSCO. Since I'm still leaning bearish on the overall market I am using a more conservative strike price than I might normally.
- Sell to open: 2 CSCO Jan 21 2012 16.0 Puts at $1.06
Since this is my first uncovered option post, let me explain how the numbers work. This trade earns me a total of $212(2*1.06*100) in option premium income. The margin requirements are 20% of the strike price which comes to a total of $640(2*16*100*20%). I expect these puts to expire worthless giving us a return on margin of 33.13%(212/640) in just over 8 months. If CSCO is trading below $16 next January, I'll have the option of either rolling the options forward or being assigned 200 shares of stock at a cost of $14.94(16-1.06). With that stock I will be able to either write covered calls against it or hold the stock long-term(I expect being able to buy CSCO at less than $15/share would be a very profitable trade).
The Numbers:
- Cash: +$212
- Short Option: -$212
- Available Margin Equity: -$640
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