The Trump Administration has made strides to subsidize American farmers during this trade war with China. It has given $12 billion so far, with another $20 billion on deck. But this isn’t the only subsidy the President is handing out to ease the pressure of Chinese trade problems.
Yesterday, Trump signed an executive order (EO) targeting a single – yet key – Chinese firm. The “Executive Order on Securing the Information and Communications Technology and Services Supply Chain” doesn’t name Chinese tech company Huawei. But there’s no denying that is the main loser in this order.
Huawei, as you might recall, is a Chinese company that’s been at the center of hot debate among U.S. politicians over the last year. The company has been accused of everything from patent infringement and technology stealing to bribing officials and espionage for the Chinese government.
Now, some of this is no-doubt true. Huawei officials have already been charged in multiple countries. But many of these charges are impossible to prove, and the company continues to steadfastly refute them.
But there’s another giant side to this story. Huawei is also one of – if not the largest – developer of 5G technology and infrastructure around the world. 5G, as you likely know by now, is the future of communications technology. This new tech will open up an astronomical amount of bandwidth, making data speeds near instantaneous.
Huawei is a leader in this. It essentially owns the entire development of the technology in China and has partnerships with countries around the world to build out the infrastructure for it. Unfortunately for the company, its main target (the U.S.) is home to several large competitors.
The brand-new EO basically excludes Huawei from developing any 5G products or infrastructure here in the United States. It also places restrictions on U.S. companies from using Huawei technology in their own products.
This obviously has a direct impact into the investment landscape around this field. But there’s still yet another piece not being discussed.
There’re two sides to this important development. The technology is being developed and implemented at both the device level – so newer devices can actually reach the bandwidth that’s opening up – and the infrastructure level to actually create the bandwidth itself. Huawei leads in both sides. But it’s important to make a distinction.
You see, an executive order is not a permanent law. It is only a directive issued by the president. It is enforceable. But it can change with a pen stroke. As China and the Trump Administration continues to negotiate terms to easing the trade war, this could be one of the first things to go.
So, its only impact will be while it is in effect. Meaning, Huawei is free to develop its 5G technology without much change. If the EO does get rescinded at some point in the next few months or years, Huawei would then be able to again partner with companies like AT&T, Samsung and even Apple (though, those two have their own differences). This basically means that it is crucial to understand which companies and which specific parts to the 5G roll out will be affected by this new rule.
Clearly, phone technology is the least. First of all, there’s always a new model out, and consumers hold on to their phones for only a year or two before upgrading. So, sure, Huawei might miss out on a few versions. But they could get back in if the EO is dropped.
The real winner out of all of this is infrastructure. This is the part that, once build, won’t be quickly or easily replaced. And the 5G infrastructure is unique. It involves a lot of different parts – from new macro base stations (like the cell towers we’re accustomed to) to several smaller micro (urban level) and pico (block or building) cell towers and spots.
These are all being rolled out now. While we don’t yet know when the devices will be ready – Apple keeps delaying its plans for its first 5G phone for instance – the infrastructure is going to go into place over the next two years in a massive way. If Huawei is excluded from the market in this time, it will lose out on the infrastructure portion of this mega communications changeover.
And on this front, there’s one major winner: Cisco Systems (CSCO).
Cisco is the leader in the U.S. infrastructure rollout of 5G technology… even if Huawei could continue to compete. It is building the networks right now and plans to cover much of the country – and others – in 5G accessibility over the next few years. This EO just makes the company even more important.
Investors haven’t ignored this fact. Shares of CSCO are up nearly 7% as we write, following yesterday’s EO. And they certainly haven’t only now picked up on Cisco’s importance to this next-generation technology. Shares have skyrocketed all year:
But even this build up and today’s spike don’t do the company justice. This is like getting into Microsoft right as it rolled out its first Windows operating system or Apple as it revealed the iPod.
The communications landscape itself is going through a revolution with this 5G technology. Cisco was already the leader. And now, for at least a time, it will be able to basically build out its networks without much of any competition.
There’s significant short-term upside here still not factored into CSCO’s price. Fortunately, there’s a great way to play it without risking much even if this expected rally takes longer than expected…
A Strategy to Play Cisco’s Good Fortune
A bull call spread is a type of options trade that involves buying one call option and selling another with a higher strike price. This basically reduces the amount of cash it takes to enter the trade and presents a clear profit range up front.
The way it works is by using the money received from the sold call to offset some of the cost of buying the first one. This reduces the net debit to the trader’s account. But in exchange, it does cap the potential profit.
You can see how this type of trade works here:
Source: The Options Industry Council
When looking to use this strategy on a company like Cisco, it’s important to set price targets. You’ll want your target price of the underlying stock to equal the higher of the two strike prices.
Your profit will be found by taking the difference in strikes and subtracting the entry cost. Let’s look at a specific example to show you what that looks like.
A Specific Trade For CSCO
Right now, a trader could buy a September 20 $57.50 call for $2.15 per share and sell a September 20 $62.50 call for $0.59 per share for a cost of $1.56 per share. Since each represent 100 shares of CSCO, that’s a total net debit to the trader’s account of $156.
That’s the total amount the trader would have at stake throughout the whole duration of this trade – all four months of it.
To find the profit potential, take the difference in strike prices ($62.50 – $57.50 = $5), and subtract the cost ($5 – $1.56 = $3.44). So, on 100 shares, that’s a payout of $344 if CSCO keeps going up.
That works out to a remarkable $221% return on the amount at risk. Remember, as long as shares continue to rise, this play would pay out every dime of this. And with this new near-monopoly in 5G infrastructure Cisco just received, that is more than likely to happen.