AT&T Inc. (NYSE:T) eagerly awaits the Justice Department’s decision this week. Judge Richard Leon’s ruling on their purchase of Time Warner Inc (NASDAQ:TWX) is imminent. This is a saga that has been going on for a while.
The decision will have repercussions beyond T. Other large corporations like Comcast Corporation (NASDAQ:CMCSA) are waiting the decision. An unconditional approval for the AT&T deal could be the green light for others to pursue their own ventures.
AT&T stock has been languishing, down 13% in one year while the S&P 500 is up 4% for the same period. So investors in the stock have been patient. Recently T has had a 5% rally in June, and now it’s back to a long-term pivot point.
Those can be resistive on the way up but also present an opportunity. Meaning that the bulls will have some hard work but if they can overcome the area of resistance then there could be a lot more upside in the near future. On the breakout, T stock could reach $37 per share.
Today’s trade is bullish, but one that does not even need a rally to profit. Even though the upside potential looks appetizing, I have more faith in downside support than upside hopium. So I will sell downside risk into what others fear and what is not likely to happen then buy and hold hoping for a rally.
Fundamentally, AT&T stock is not cheap. It sells at a 20 price-to-earnings ratio which is not bloated either so owning it at a discount is not likely to be a major financial disaster.
Most analysts on Wall Street have been on hold in T stock, and it is still trading below their average price ranges. So the ruling could open the possibility of upgrades in ratings. There is a chance that the rule won’t be a clear decision to let the merger pass unconditionally. The judge is likely to impose special conditions and if so, this could create a let down in the stock.
If the saga drags on then the rally may not come as the bulls hope. So using options allows me to build some room for error where I don’t get hurt either way. I am confident that I can bet on proven support and still retain maximum gains.
T Stock Trade Ideas
The Trade: Sell the T Jan 2019 $30 naked put and collect $1 to open. Here I have a 80% theoretical chance that I would retain maximum gains. But if the price falls below my strike then I accrue losses below $29.
Selling naked puts is daunting. Those who want to mitigate that risk can sell spreads instead.
The Alternate Trade: Sell the T Jan 2019 $30/$28 credit put spread. The spread has the same odds but would deliver 20% yield on risk. Neither trade requires a rally to profit. In fact, the stock can fall an additional 12% and I could still retain maximum gains.
Click here for more my market thesis and get an ongoing free copy of my weekly newsletters.
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 as @racernic on twitter and stocktwits.
