The perception is that Verizon Communications Inc. (NYSE:VZ) is the cream of the crop when it comes to services. Yet, VZ stock has had a rough start of 2017, down more than 15% since the year started. And Alibaba’s (NYSE:BABA) negative reaction to earnings this morning could add to the sell pressure in Verizon.
Fundamentally, Verizon stock is cheap relative to its peers from a price-earnings perspective.
Furthermore, the company pays a healthy dividend and if the weakness in equities were to persist, the VZ dividend should make its stock more attractive to buyers.
In times of turmoil, investors seek protection and dividends offer some of that to a degree. I could make a similar case to go long AT&T Inc (NYSE:T), but for now I believe T could have further to fall if the general malaise persists.
The good news is that expectations from VZ stock are humble, as the majority of analysts have it as a “hold.” So it’s more likely there will be a positive ratings surprise than a negative one.
Technically, the daily chart looks terrible and would scare off most traders. The weekly chart, however, reveals that VZ stock is now just above a support zone that has been pivotal since 2012. I doubt that investors suddenly realized that they had the Verizon story wrong for the past five years.
Click to Enlarge Alas, we never hear bells for the perfect time to go long. Moreover when VZ stock is falling so fast most investors are left out scared and therein likes the opportunity.
As we near a five-year support zone, I am brave enough to sell risk against those fears. I am not saying that I expect a massive rally, but I am trying to generate income from fear.
I am a fundamental investor, so I don’t mind owning Verizon stock at a 14% discount from today’s price.
The Bet: Sell the VZ Dec $38 put. This is a bullish trade for which I collect 85 cents per contract to open. I have a 90% theoretical chance of retaining maximum gains, but I will accrue losses if the stock falls below $37.15 per share.
Selling naked puts is risky, especially in falling markets. So to limit the risk size, I can use a credit put spread instead. For example, the Dec $38/$37 credit put spread delivers 15% yield with 90% theoretical certainty. Compare this with buying VZ stock with no margin for error — it would need to rally 15% to match the spread performance.
Learn how to generate income from options here. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @racernic and stocktwits at @racernic.