Trade Update $T: Closing Long Call Position for Small Gain as Stock Approaches Resistance

by Dan September 16, 2013 9:44 am • Commentary

Exactly one month ago I initiated this long call position with the thought that high dividend paying stocks that had gotten hit as rates rose over the last month would possibly come back in vogue if bounds were to bounce if the Fed did not indicate that they would be Taper bond purchases at their Sept meeting.   Well it appears the Taper is on, whether it be by $15, $10b or $5b, the equity markets seems fairly ok with it.

I am going to close the T long call position as the stock approaches its 50 day moving average which could be a sport of technical resistance.  In the trade note (below) I also signaled that the iPhone launch in Sept could be a positive catalyst for T, but looking at AAPL performance since the announcement last week, I think investors are setting up for a far from stellar launch.

ACTION: T ($34.68) Sell to Close Oct 34 calls at .95 for a .15 gain

By no means was this trade a home run, but the small gain beats a sharp stick in the eye, and given the potential overhead resistance, and the recent bounce in the shares from just above $33, risking .95 to possibly make another .50 to 1.00 does not seem like a great risk reward.


Original Post Aug 16th, 2013:   New Trade $T: Dropping Calls

The bond market doesn’t seem to care much about the back and forth between the conflicting economic data which could or could not lead to the Fed to taper bond purchases as soon as mid to late September.  The yield on the 10 year treasury continues to rise to 2 year highs, which some think is clearly anticipating a taper in the weeks/months to come, while others think it could be a rotation into riskier assets like equities in Europe and emerging markets.  Whatever the reason, rates have had a fairly historic short term rise, albeit from very depressed levels, and has caused a bit of collateral damage in certain sectors of the market like Homebuilders, Reits & Utilities, but also stocks that had been perceived to be bond proxies like telecoms T and VZ.

Earlier today I wrote (here) that the price action of risk assets of late has made it difficult to discern what the “data dependent” Federal Reserve will do (or more importantly say) after their Sept 17-18 pow wow, but a contrarian play after such a substantial sell off in bonds would be to play for a bounce in the event of no taper.  You can buy TLT to make this bet after the 16% decline since May 1st, but to be frank I don’t have very strong conviction that bonds rally.  The market is clearly getting in front of the fact that bond purchases will be less, per the Fed chairman’s guidance in late May, but the extent and timing are the gazillion question.

The bounce in the last 24 hours of home-building stocks is very interesting, especially as bonds cant rally, they appear to send out very conflicting messages, but maybe just maybe savvy equity investors have made the decision taper or not, they are too oversold.  Which leads me to telecoms, particularly, T, this is a stock that has reasonable valuation support, is approaching a key technical support level, pays a 5.25% dividend yield and has the catalyst of a new iPhone launch in the coming month.

On purely a technical level I like the entry, the stock is down almost 12% from the 5 year highs in April, and sitting on a key near term support level (white line).  I want to play for a bounce back to near term resistance at ~$36.

T 1yr chart from Bloomberg
T 1yr chart from Bloomberg
TRADE: T ($34.00) Buy the Oct 34 Call for .80

-Bought  T Oct 34 call for .80

Break-Even on Sept Expiration:

-Profit above 34.80

-Losses of up to .80 btwn 34.80 and 34, max loss of .80 below $34

Trade Rationale:  If the Fed does Taper in Sept I would expect bonds and stocks get hit, and stocks like T that have widely been considered by equity investors as “bond proxies” also get hit.  But if you want to be contrarian, and you feel that the yield move of the last couple months makes the potential of Sept Taper less likely that the Fed actually acts, then stocks like T should bounce.  IN a low vol name like T it makes defined risk plays even that much more attractive.  If the stock bounces in the coming weeks towards $35 I will look to spread the Oct 34 calls by selling the Oct 36 calls further reducing my break-even.  ALso important to remember, I chose at the money option as I see the iPhone launch in Sept as an additional potential fundamental catalyst and I wanted more deltas to the trade rather than an out of the money option that will see quicker decay.

I am also of the mindset that if the Fed does not Taper it is likely because things are bad, and money could flow back into defensive domestically focused names like T.

This is a small contrarian position