AT&T Inc. (NYSE:T) shares are under assault. The bearish barrage is intensifying, and all appears lost — but that is precisely why my inner contrarian is growling. In times past, when T stock reached oversold levels as deep as this, it paid to back up the truck and buy.
With the 50-day and 20-day moving averages nosediving, AT&T’s trend is atrocious. The descending 200-day confirms this is a long-term slide versus quick trip down south. But, hey, if you’re going to trade against the trend isn’t the best time to do it when the stock is grossly oversold?
We’ve seen this movie before. Check out the channel drawn in the accompanying chart (dotted black lines). Note how the last two times T descended to the lower end, buyers finally came out of the woodwork. While this time could be different, I’m betting the worst is over for the current downswing.
Since peaking at $39 (the upper channel trendline), AT&T stock has fallen 21%. That’s a substantial move for a low-beta telecom company.
The descent has been so severe that T’s dividend yield has now risen to a juicy 6.47%. This cash flow potential will beckon to buyers at these lowly levels and thus stem the decline.
Use Naked T Puts to Elevate Your Odds
While I don’t think accumulating shares of T stock is a bad idea, let’s use options to increase our probability of profit. Instead of buying AT&T at $31.70, how about we sell the June $31 puts for 70 cents?
The max reward is $70 and will be captured if the stock sits above $31 at expiration. Since the initial margin requirement is only around $600, this provides a fantastic return on investment of 11.7% in a little over one month. If AT&T continues plumbing the depths, you will be obligated to buy the stock at $30.30 ($31 – 70 cents) which provides a 3.5% discount to the current price.
As of this writing, Tyler Craig held bullish options positions in T. Want more education on how to trade? Check out his trading blog, Tales of a Technician.
