Two big acquisitions were rumored or informally announced this weekend by Microsoft (NASDAQ:MSFT) and Seven & i Holdings Co., Ltd. (OTC:SVNDF), the company that owns 7-11, and they helped push the market higher yesterday.
Regardless of whether MSFT can pull off a purchase of TikTok, or SVNDF can buy Marathon Petroleum Corporation’s (NYSE:MPC) Speedway convenience stores, the idea that multibillion-dollar deals are still being attempted probably lifted investors’ spirits again.
We don’t necessarily buy into the hype, but we do think this presents an income opportunity. We’ve been holding shares of Cisco Systems (NASDAQ:CSCO) in our portfolio, and now is a great time to capitalize on this bullish move.
M&A Activity in the Long Run
Most mergers and acquisitions (M&A) activity at this scale winds up being a drag on earnings for years, so we think the market will come back down soon.
But the argument in favor of the bulls goes something like this: if management is willing to take on a merger or acquisition — both of which are risky and theoretically zero-sum games — then their confidence in market and economic stability is high.
The assumption is that managers know more about the economy than the average investor, which is why the market usually builds some momentum after deals like these are rumored or announced.
As we said, history has shown those assumptions to be invalid from a longer-term perspective.
However, most traders looking for any excuse to buy still seem to believe M&A activity is a good reason to get bullish.
Regardless of whether we are willing to give these proposed acquisitions the benefit of the doubt, we think this is a good time to take advantage of some of that bullish momentum.
CSCO’s Approaching Earnings Report
We were originally planning to leave our shares of CSCO uncovered, but plans change. As we gathered more economic data, we decided selling more premium is the better approach, and traders must take opportunities as they present themselves.
If you, like us, have been holding shares of CSCO, you can use a covered call to collect some income while you wait for the stock to rise.
As you can see in the following chart, there is a formidable resistance level at $50 per share, which would make a good strike price for a covered call.
Daily Chart of Cisco Systems (CSCO) — Chart Source: TradingView
Setting a strike at resistance lowers your chances of having your shares of CSCO called away.
Premiums are high right now because CSCO will report earnings on Aug. 12, and you can generate extra income by selling an option with an expiration date after CSCO’s report.
That kind of trade carries a lot more risk because earnings can lead to big movement. We don’t expect CSCO to move too far if it beats expectations, but we also don’t recommend obligating yourself too long in this position.
Remember, if CSCO closes above your strike price at expiration, you will have your shares of CSCO called away.
InvestorPlace advisers John Jagerson and S. Wade Hansen, both Chartered Market Technician (CMT) designees, are co-founders of LearningMarkets.com, as well as the co-editors of Strategic Trader.
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