Both off and on the price chart Wall Street still has more questions than answers regarding media communications play Viacom (NASDAQ:VIAB). But for VIAB stock investors that see value in an uncertain operating environment, an intermediate-term modified fence is a merger of two spreads that’s wedded bliss.
Let me explain.
On the surface, VIAB stock may seem like an attractive value play. Class B shares trade at a paltry 7.0 times 2019 consensus earnings. There’s also a 2.6% dividend. As well, an industry dominated by the likes of AT&T (NYSE:T) and Time Warner, Disney (NYSE:DIS), Comcast (NASDAQ:CMCSA) and Netflix (NASDAQ:NFLX) has and continues to see its share of mergers.
So why not own VIAB with entertainment brands like a reinvigorated MTV, VH1, Comedy Central or Paramount? Well, it’s not that simple. For one, there’s Viacom’s fairly leveraged debt situation and declining revenues to consider. The combination isn’t exactly necessitating a race to the altar from other larger companies to make a bid for Viacom.
The one party that has shown real interest, CBS (NYSE:CBS), has its own share of issues. Not only is CBS also failing to knock it out of the park these days, but a contentious board situation and sexual misconduct allegations against Les Moonves, the face of CBS, leaves most investors seeing more questions than answers for VIAB stock.
And beyond those concerning top, bottom and possible hemlines, there’s also a squiggly price line on the VIAB stock chart, which remains a big question mark.
VIAB Stock Monthly Price Chart
As a technical-oriented investor, I’m typically attracted to finding the proverbial diamond in the rough. The reason being that Wall Street has a recurring motif operandi of changing its tune when hope has given way to despair. And in looking at VIAB stock on the monthly view, I’m confident there’s more despair than hope these days.
Nearly a decade since the lows of the financial crisis VIAB stock is steeped in a downtrend of nearly five years in duration. In the process, shares of Viacom have also failed to hold the 62% Fibonacci retracement level and a support line considered sacrosanct to most bulls.
So, what’s an undeterred bull to do in VIAB stock when the deck seems to be stacked against them? A modified fence strategy looks like one smart way to get long share exposure with reduced and limited risk versus buying stock.
VIAB Stock Intermediate-Term Modified Fence
A modified fence on VIAB stock combines or marries two bullish verticals. A call spread is purchased to capture upside potential. At the same time, a put credit spread is used to finance a portion or the entire cost of the bull call vertical. The contained downside risk can also allow a bullish trader the opportunity to go long VIAB for a discount to the current market price.
Reviewing Viacom’s options in Friday’s session, one combination which looks interesting is buying the Mar $30 / $32.50 call spread and selling the Mar $27.50 / $25 put spread for a debit of up to 70 cents.
With shares at $31.18 the modified fence is intrinsically worth $1.18 and would result in a return of 68% at expiration. Above $32.50 and below chatter of a takeout price of $33 to $35 a share, the strategy would capture $1.80 of profit or 257%.
One caveat is investors are forgoing a couple dividend payments with this strategy. As much, income investors will have a problem with this play. However, with well-positioned upside potential and the opportunity to get long VIAB stock for no worse than $28.20 or nearly 6.5% below today’s still questionable levels, these two combined spreads are like wedded bliss in this trader’s view.
Disclosure: Investment accounts under Christopher Tyler’s management currently own positions in MOMO stock and its derivatives. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.
