Analysts have been increasing their target prices for Cisco, Inc. (CSCO) based on management's guidance. Shorting out-of-the-money (OTM) CSCO put options could be a good strategy here.
CSCO closed at $68.21 on Friday, September 19. This represents an increase from its recent low of $66.53 on September 12. However, it's down from its peak of $71.79 on August 8.
I wrote a month ago that CSCO was worth $75.81 based on its free cash flow ("Cisco's Strong Free Cash Flow Could Make CSCO Stock Worth 14% More" Barchart, Aug. 18).
I also suggested a short out-of-the-money (OTM) put play. This article will review these price targets and the short-put play strategy.
Higher Price Targets
Since my last article, analysts have kept their revenue forecasts about the same. They forecast almost $60 billion ($59.66 b) in sales this year, ending July 2026.
Last quarter, Cisco generated a 27.38% free cash flow (FCF) margin on sales, according to Stock Analysis. And over the last year, its FCF represented 23.46% of revenue.
So, on average, we might expect FCF to reach 25.4% of forecast sales:
$59.66 billion 2026 revenue est. x 0.254 = $15.15 billion FCF
Using a 5.0% FCF yield metric (i.e., 20x FCF multiple), Cisco's market cap could reach $303 billion:
$15.15b x 20 = $303b mkt cap
That is 12.37% higher than today's market cap of $269.648 billion (Yahoo! Finance data). So, CSCO stock is worth +12.37% more:
$68.21 x 1.1237 = $76.65 per share
So, we have raised our price target slightly from $75.81 to $76.65. Analysts have also upped their targets.
For example, Yahoo! Finance's survey shows that 26 analysts have a price target of $76.10, up from $75.58 a month ago, as seen in my Aug. 18 Barchart article. Barhart's survey shows a jump from $75.06 last month to $76.58.
Moreover, AnaChart's survey of 21 analysts shows a price target of $79.18, up from $77.17 a month ago. This represents a +16% upside from Friday's close.
The bottom line here is that price targets for CSCO are moving slightly higher. But the upside is still limited - between +12.4% and +16%.
That presents a good opportunity for short sellers of out-of-the-money (OTM) puts. That is especially the case if CSCO stays close to its present price over the next month.
Shorting OTM CSCO Puts Works
Last month, I discussed shorting the $64.00 strike price put option expiring Sept. 19. At the time, CSCO was at $66.50, so the play was 3.76% out-of-the-money (OTM).
The premium received was $0.62, or about a 1% one-month yield (i.e., $0.62/$64.00 = 0.96875%).
Since the CSCO closed at $68.21, the investor had no obligation to buy 100 shares at $64.00, and the yield play worked well.
Note that CSCO rose 2.57%, so investors who also owned CSCO shares and also shorted puts would have made the most money.
This play can be repeated. For example, the next month expiry period (i.e., ending Oct. 24), shows that the $66.00 put option, 3.24% out-of-the-money, has a $0.97 midpoint premium.
That means short-sellers of this put contract can make an immediate one-month yield of 1.47% (i.e., $0.97/$66.00 = 0.0147).
CSCO puts expiring Oct. 24 - Barchart - As of Sept. 19, 2025
To do this, an investor must first secure $6,600 in cash or buying power with their brokerage firm. Then, after entering an order to “Sell to Open” 1 put at $66.00, the account will immediately receive $97.00.
Downside Risks
As a result, no matter what happens, the investor's net breakeven point, should CSCO fall, is $66.00 - $0.97, or $65.03.
That is -4.66% below Friday's close of $68.21. So, it provides good downside protection. This also means existing investors have the opportunity to potentially lower their buy-in cost.
Note that the delta ratio is over about 30%. That implies almost a ⅓ chance that CSCO stock could fall to $66.00 over the next month, based on past trading patterns.
So, this play is not without some downside risk. It could even result in an unrealized loss, if CSCO falls below the $65.03 breakeven point.
However, keep in mind, the worst that happens here is that the short-put investor would end up owning CSCO shares. So, based on our price target, the breakeven point provides a potential higher upside:
Moreover, keep in mind that the short-put investor can always sell out-of-the-money calls if their collateral is assigned to buy shares at $66.00. That could mitigate the downside and any potential unrealized capital loss. They can also continue to short more OTM puts and accumulate more income to reduce any loss.
In addition, the investor could roll over any potential losing short-put play to a later period and hope to make up for any loss. Barchart has an Options Education Center that provides webinars on how to do this.
The bottom line here is that CSCO stock looks cheap. Shorting out-of-the-money (OTM) puts is one way to profitably play CSCO, especially if it stays relatively flat over the next month.
On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. This article was originally published on Barchart.com
