According to the Wall Street Journal this morning, TP-Link, which is Amazon’s best-selling router and has made its way into 65% of US homes and small businesses (this is a massive flaw in our Monopolistic form of Capitalism) are full of security holes and, whether they are there on purpose or through simple neglect – they are frequently exploited by Chinese hackers (TP is Chinese too – what a coincidence!).
While routers often have bugs, regardless of their manufacturer, TP-Link doesn’t engage with security researchers concerned about them and now the Commerce Department has subpoenaed the company, likely steps towards a ban. Liu Pengyu, a spokesman for the Chinese Embassy in Washington, said the U.S. was using the guise of national security to “suppress Chinese companies.” He added that Beijing would “resolutely defend” the lawful rights and interests of Chinese firms.
TP-Link’s U.S. growth took off during the pandemic, when people were sent home to work and needed reliable internet. The company climbed from around 20% of the U.S. market for home and small-business routers in 2019 to around 65% this year. It took an additional 5% of the market in just the third quarter of this year, according to industry data. TP routers are often half the price of competitors – perhaps a new paradigm for “Subsidized Spyware” and, of course, leading Telcos (who just got hacked) partner with TP to automatically install their routers for new customers and even NASA, the DEA and the DOD have supply contracts with low-bidder TP.
Anyway, we’re F’d but, as usual, we can make some money off it and money makes everything all better, doesn’t it? Our friends at Cisco (CSCO) dominate the US Enterprise Market with a 33% share and, if TP gets banned – they are well-placed to fill the gap. CSCO is already shadow-banned in China so little fear of retaliation and CSCO is all about security in their systems – even the SOHO Consumer Segment.
While up over 30% since August, the stock (which we already have in our Butterfly and Long-Term Portfolios) is simply trying to catch up to the 60% earnings growth they are on track for into next year already. In fact, analysts following CSCO (and there are many) have revised their earnings estimate higher 20 times in the past 3 months with no one daring to revise them lower.
With the acquisition of Splunk (AI Infrastructure), 27% profit margins and growing subscription revenues, we like CSCO as a long-term play and a fun thing you can do with options is say “I wish I had a chance to buy CSCO when it was $45” and I can say to you – like the ghost of Christmas whichever one says: “Why you still can! Through the magic of options!” That’s right, Ebeneezer – you can sell the 2027 $47.50 puts for $2.50 and that puts $2.50 in your pocket and nets you into the stock for $45 – a Christmas miracle!
From a value perspective, however, I’m happy to own CSCO at net $53 so we like the following spread as a new trade:
-
- Sell 10 CSCO 2027 $60 puts for $7 ($7,000)
- Buy 15 CSCO 2027 $50 calls for $12.50 ($18,750)
- Sell 15 CSCO 2027 $65 calls for $5.50 ($8,250)
That’s net $3,500 overall on the $22,500 spread so there’s $19,000 (542%) of upside potential if CSCO can make it over $65 by Jan, 2027. We risk being assigned 1,000 shares at $63,500 (if we lose 100% of the spread) but anything over $54 makes us a profit. In fact, the spread is currently $13,395 in the month – that’s off to a very nice start!
That is the power of using stock options in place of stocks – we use far, FAR less cash to make our trades and we leverage our upside so a 10% gain in CSCO can make us 542%. If we were to buy 1,000 shares of CSCO for $58,900 and it hit $65 ($65,000), we’d only make $6,100 – NOT $19,000 – THAT is what I mean by useful leverage!
Here we’re using $3,500 in cash – NOT $58,900 and our ordinary margin requirement is $11,782.50 – allowing us to diversify our remaining allocation into other positions or just keep it on the sidelines for adjustments.
Traders being afraid of options are like a construction workers being afraid of hammers: You might still get the job done – but you are making it A LOT harder on yourself for no reason…
So enjoy CSCO – for now – as Quantum Computing will make all encryption obsolete and Google just announced a huge breakthrough in that regard with the Willow Chip, which is able to solve in minutes what the World’s top super-computers could not calculate in Billions of Years (like your passwords).
Fortunately, we have 5-10 years before these chips are readily available – unless, of course, there’s a breakthrough – then we are totally screwed!
