This is not something we do often — usually because these types of opportunities don’t present themselves frequently. But we’ve identified an under-appreciated potential for a 20x gain on our invested capital if the markets cooperate.
Its the perfect storm of a megacap stock emerging from an long base, options flow showing people are starting to position for “something” and an ASC price target that doesn’t appear to be priced in by the crowd.
Of course, part of the reason for the elevated options activity is due to an “Investor Day” event happening today, but the action still has been raising some attention.
Check out this chart of Cisco Systems $CSCO in our most recent Follow the Flow report:
You’ll notice there’s been some unusual activity in the Sept 17th expiration 58.50 calls.
Here’s what the team reported:
This one’s been working on a 20-year base ever since collapsing by roughly 90% during the dot-com bubble crash. And after all these years, it’s not too far off from achieving it.
But here we’re looking at a smaller base that’s formed over the trailing few years. Price recently eclipsed resistance at its key highs from back in 2019. At the same time, despite going nowhere on a relative basis for decades now, it’s still holding support vs the broader market.
With risk as well-defined as it is in this communications and networking conglomerate, we’d be remiss not to take a shot on the long side here. And it always feels good knowing we have some major money from the options market betting alongside us.
We want to own CSCO above 58 with a 2-4 month target of 74.
Now, it may emerge that the elevated options activity will be short lived and was due only to the event taking place today. That’s fine. What really has my attention is that chart and potential for a major base breakout. Thank you short term options players for surfacing this opportunity on our radar. You play your game, we’ll play ours.
So check this out: If $CSCO were to make a run to hit our price target of $74 by January (four months from now), we could potentially earn more than 20x on our invested capital. How?
Here’s the Play:
We’re buying $CSCO January 70 calls for approximately 23 cents. These options are priced as a long shot and we’ll be treating it as such. I’m fully prepared to lose 100% of my capital on this trade if $CSCO doesn’t make the move we need. So I’ll be sizing my position accordingly.
But if it goes our way, we should get plenty of opportunity to take our original risk off the table along the way. My best practice is to sell half of my position when the value of the options have doubled. And I will do that in this case. Then I’ll hold the rest, looking for the big move.
If $CSCO gets to our 74 price target, those 70 strike calls will be worth at least $4.00 — probably more, depending on when that price is reached. $4.00 per contract would be 20x what we originally paid. YAHTZEE!
Since we’re getting in at a cheap price and we’re treating this as a long shot, I don’t expect we’ll have any opportunity to cut our losses if the stock reverses on us. But if $CSCO loses the $55 price level, then our play is probably dead in the water. If there’s any premium left to salvage in the calls, I’ll take it.
If you have any questions on this trade, please send them here.
P.S. We do trades like this regularly. If you’d like to leverage Best-in-Class technical analysis into smarter directional options trades, try out All Star Options Risk Free!