Well, I was up at 5am here in NM time, talking about cattle trading, inflation, the fallacy of a difference between the Republican and Democrat policies despite each of their respective claims of being otherwise, and…the opportunity in buying long-dated, Cisco calls. The stock is trading at about 7x next year’s earnings, when you account for the nearly $6 per share in net cash on their balance sheet.
While I’m not getting comfortable paying the premium in the Corning calls, that outsized premium in the Corning calls especially relative to the premium in the Cisco calls, is in large part because of the recent direction of both the stocks and the earnings estimates. Corning’s stock has been strong — very strong, as it remains within a dollar of its recent 52-week highs — and likewise, Corning reported a very strong quarter last quarter and saw its forward estimates raised. Meanwhile Cisco stock’s at a 52-week low mainly because the company has disappointed Wall Street by missing estimates and guiding the next quarter’s estimates lower the last couple quarters.
When you break it down with the current $2 or so ask quote for the current Cisco January 2013 calls with the $20 strike price, you’re paying a 10% premium for the right to buy Cisco in January 2013 at about 10% above its current quote. The $25 January 2013 call options in Corning, on the other hand, what with their current $3 plus quote, right now, will cost you a nearly 15% premium for the right to buy the stock nearly 15% above its current quote.
I think both stocks are very inexpensive and poised to head higher in the next couple years from their current quotes right here, right now. And given that I do expect each stock to rally more than 50% above their current quote in the next two years, that means that I’d love to use the leverage that comes with using out-of-the-money call options to really make some big returns on the capital risked, but because of the premium differences, my potential gains on Cisco rallying 50% in coming weeks vs. a 50% move in Corning is also a huge difference.
I’d net about 250% on the Cisco calls if it rallies 50% in the next 100 weeks that I have before the call options expire ($2 cost basis for the calls, plus the $20 strike price , subtracted from the $27 it would be at were it to rally 50% from its current quote = $5 profit on $2 invested = 250% return). But I’d “only” net 167% or so on the Corning calls were the stock to actually rally 50% in the next 100 weeks I have before the call options expire ($3 cost basis for the calls, plus the $25 strike price, subtracted from the $33 per share it would be at were it to rally a full 50% from its current quote = $5 profit on $3 invested = 167% return).
All that to say, that I just more than doubled my call option exposure to Cisco and haven’t yet pulled the trigger on the Corning.