Verizon Communications Inc. (NYSE:VZ) stock is down on a headline that precludes it from a potential deal in the telco sector.
While VZ stock gets no respect from Wall Street, its cell service is the cream of the crop. The stock is now down to a two-year-old consolidation zone. Pivot points this significant usually become fierce battle zones between bulls and bears. Neither side is likely to let it go without a good fight.
Therein lies the opportunity to sell premium and let the potential stalemate create income out of thin air.
Click to Enlarge Fundamentally, Verizon is the cheapest of the telcos. Analyst expectations are too humble. So the risk of surprise downgrades is low, especially after a sizable stock drop. There is little froth left in this stock.
There is the threat of the price wars between them and T-Mobile US Inc (NASDAQ:TMUS), but over the long run, this is part of any business model and not a stock-specific problem.
Technically, Verizon stock is down 18% off the 2017 high. $44.40 per share is important to hold or could open the door for a retest of $42. While this is not a forecast, it’s a scenario that I have to consider while designing a bullish trade.
VZ Stock Trade Idea
The Trade: Sell VZ Oct $42 naked put and collect 85 cents to open. Here I have an 80% theoretical certainty that I will retain my premium for maximum gains. But if the price falls below my strike, then I have to own the shares and could suffer losses below $41.15. I do have to note that VZ stock often falls on earnings, so I could buy cheap July puts to cover the disaster earnings scenario.
Given the value of the stock and its dividend, if the worst-case scenario unfolds, I would be happy to temporarily own the shares especially that it pays a healthy dividend.
I realize that not everyone wants to own Verizon shares. For those people, I would use a bull put spread instead to accomplish the same goal.
The Alternate Trade: Sell the VZ Oct $42/$41 credit put spread where I have the same chances of success but with limited risk. Yet, if the spread is successful it would yield 25%.
For someone who wants to be even more bullish, they could buy August at-the-money calls or call spread to capture the upside move if it comes. I personally am happy to generate the income from what others fear in VZ stock this morning.
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.
