Cisco Systems Is In A Trading Range Ahead Of Earnings - Shorting OTM Puts And Calls Works

Analysts have been raising price targets for Cisco Systems (CSCO), which is set to report fiscal Q4 earnings on Aug. 12 (after the market close). CSCO stock has been trading in a range for a while now. Shorting one-month out-of-the-money (OTM) puts and calls is an attractive play that has worked well for investors.

CSCO stock - last 3 months  - Barchart - Aug. 7, 2026

CSCO closed at $121.43 on Friday, which is roughly where it was two months ago. For example, on June 1, it closed at $121.33. That was just two weeks after its last earnings release on May 13.

Shorting OTM Puts and Calls Works

I discussed this play in my last Barchart article on July 14, “Cisco Systems Stock Is in a Trading Range - Good For Shorting Puts and Calls,” as well as an earlier June 19 Barchart article, “Shorting Out-of-the-Money Cisco Puts and Calls Provides Shareholders Extra Income.”

Investors would have made more money shorting out-of-the-money (OTM) puts and calls than holding CSCO stock.

For example, on July 14, I discussed shorting the Aug 14 expiry $130 call option (with CSCO trading at $119.25) for $3.43. On Friday, Aug. 7, that premium had fallen to a midpoint price of $2.03, with just 6 days left to expiry. 

That means a short seller of this call contract would make a $2.40 profit if they were to close out the trade. That's more than CSCO has risen ($121.43-$119.25 = $2.18) over the last 3 weeks.

Moreover, I also discussed shorting the $110 put for the same Aug. 14 expiry, at a premium of $3.19. On Friday, it had dropped to 98 cents, giving the short seller a $2.21.

Here is the total return: $2.40 +$2.21, or $4.61, compared to the CSCO rise of $2.18, or twice as much.

Return on Capital Calculation

However, let's look at it on a capital return basis. The investor had to buy 100 shares of CSCO for $119.25, or $11,925 for the covered call play. In addition, to do thecash-secured put play, the investor had to post $11,000 in collateral:

   $11,925 +$11,000 = $22,925 capital employed for three weeks.

   $240 + $221 = $461 total return

  $461 / $22,925 = 0.0201 = 2.01% for three weeks

That works out to an annualised expected return (ER) of 34.84% (i.e., 2.01% x 17.33), as there are 17.33 sets of three weeks in a year. That assumes it can be repeated, but it's a very attractive ER play.

Moreover, this 2.01% return on capital compares favorably with the 1.828% rise in CSCO over the same period (i.e., $121.43 on Friday, Aug. 7 / $119.25 on July 18). In other words, it was better than buying and holding CSCO stock.

In addition, after closing out the short put and call plays, the investor now has $22,925 + $461, or $23,386 in capital that is free to be reinvested.

New CSCO Short Call and Put Plays

For example, look at the Sept. 11 expiry, just over a month from now (34 days to expiry or DTE). The $134 call strike price, over 10% higher, has a midpoint premium of $2.88. That provides a covered call yield of 2.37% (i.e., $2.88/$121.43) over the next month.

Moreover, the Sept. 11 expiry period $112.00 put option strike, 7.77% lower, has a midpoint premium of $2.81. That gives a short seller a cash-secured yield of 2.509% (i.e., $2.81/$112.00).

CSCO calls and puts expiring Sept. 11, 2026 - Barchart - As of Aug. 7, 2026

Both of these options are at similar distances from the trading price and delta ratios as before in my last Barchart article. The total expected return is:

  $288 + $281 = $569

  $569 / ($12,143 +$11,200) = $569 / $23,343 = 0.02438 = 2.438% over one month

Note also that the total capital required of $23,343 is covered by the $23,386 already received (see above) from closing out the prior trade.

Downside Risks and Mitigation

However, this does not cover any downside risks. Some investors may want to either buy a further OTM strike price put contract and/or buy a higher OTM option strike price call option.

That will reduce the returns. But note that the investor has already accumulated some capital. 

Moreover, the worst that can happen here is that either the CSCO shares held are sold for a profit at the covered call strike price, or the investor's account is assigned to buy 100 shares at the put option strike price.

Those are not bad outcomes. That is why value investors like this play.

For example, analysts have since raised their price targets from $127.18 (Yahoo! Finance) on July 18 to $132.59 as of Friday. Similarly, Barchart's mean analyst survey PT is up from $129.23 three weeks ago to $131.32.

That means buying CSCO at $112.00 (with an assigned put option on Sept. 11) provides an expected return of 17.16% ($131.22/$112). Including the 2.438% income return, the total ER is 19.60%.

That is an attractive expected return for value investors in CSCO who short near-term puts and calls.