Cisco Systems is sitting above its 21-day exponential moving average as well as the 50-day and 200-day moving averages. The tech giant is also breaking out to a new high. Investors who think Cisco stock might trade sideways for a few months could look at selling covered calls on their underlying stock position to increase income.
Cisco recently became an IBD Stock of the Day as the company was trying to get "on the right side" of artificial intelligence. Shares added 0.7% on Friday on a day when many popular stocks came under pressure. The stock rallied again on Monday and has cleared a 65.75 buy point in a four-month cup with handle.
While Cisco Systems pays a 2.4% yearly dividend, options can increase that yield by using a covered call strategy. A covered call involves buying a contract of 100 shares of the underlying stock and simultaneously selling a call option against those shares.
Selling the call limits the upside but increases the yield from the investment in the form of option premium. The investor keeps the premium generated from selling calls no matter what happens with the stock.
When trading covered calls, most investors sell monthly calls against their stock to make the most of the effects of time decay. That makes a lot of sense but also requires a lot of active management.
Mechanics Of A Long-Term Covered Call
What if we sold longer-term covered calls against Cisco stock? Let's take a look.
On Cisco stock, a June 18, 2026-expiration call option with a strike price of 70 recently sold for around $4.50 per share. That generates $450 in premium per contract.
Purchasing 100 shares of Cisco Systems stock will cost around $6,630, based on recent trading. But the net cost can be reduced by the $450 option premium received. On Monday morning, the 70 call traded at $5.21, which would generate $521 in premium, and best bid price rose to $5.30.
Therefore, we have created a yield in 361 days of 7.3%, or 7.4% annualized. That clearly beats the dividend yield on most stocks in the current market. It also allows for around $370 of capital appreciation.
If Cisco closes above 70 on the expiration date, the shares will be called away at 70. That leaves the trader with a 13.3% return, or 13.4% on an annualized basis.
If Cisco closes below 70 on the expiration date, the investor can sell another call if they want to continue generating option premium.
How Cisco Stock Stacks Up
Covered calls are a fantastic way to generate income from a stock while also providing some downside protection.
But how do Cisco shares stack up now? According to the IBD Stock Checkup, Cisco stock ranks third in its group and has a Composite Rating of 94, an Earnings Per Share Rating of 74 and a Relative Strength Rating of 88.
Investors would need to weigh the pros and cons of the stock before initiating a bullish trade like a covered call.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a masters in applied finance and investment. He specializes in income trading using options, and is conservative in his style. He also believes patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ.
