AT&T (T): I ain’t gettin’ on no plane, Hannibal

by CC March 19, 2012 2:11 pm • Commentary

I mentioned in the previous post that the market seems overbought but we’ve been looking for trades that we would want to put on on a market pullback.

AT&T has quietly made new highs this year in a creeper trend with very low realized volatility, but it is clearly benefiting from increased wireless data usage due to smartphone use, particularly iPhones.  In fact, the company feels comfortable enough to increase prices on data usage for smartphones, a good indicator of strong pricing power.  This is not the type of stock that we’d look to chase, with a chart like this:

1 Yr T chart from Livevol Pro

However, any time a stock is making new highs, it’s worth checking out option pricing to see  how much future volatility is expected. Given that the move so far has been on very low realized volatility, it’s not that surprising to see cheap option pricing, best seen here:

2 Yr T IV vs HV from LiveVol Pro

However, volume picked up on Friday, as 23k of the Apr 32 calls traded in the name.  On a premium basis, the calls trading at $0.22 seem like a downright steal.  The volatility argument is certainly part of it, and when T pays its next dividend, the stock will drop by 44 cents, so it really needs to go up about $1 between now and expiry to break even.  Yet, despite an overextended stock chart, and given what AAPL is doing, and given the low premium for more than a month of time value, these calls are one of the few calls that offer good risk/reward in a market like this.

We ain’t getting on this plane now, but this is a name we will look at seriously with any kind of market pullback. Stay tuned.