Earlier today in the MorningWord I laid out a thesis where bond proxies may once again become attractive to investors in a slow growth environment after last years dramatic equity returns and price action in bonds that might have discounted the Fed’s Taper.
On a single stock level, VZ looks interesting as the stock has dramatically under-performed the SPX since last May’s highs, as the VZ is % below those levels and the SPX is back the May 2013 highs:
The one year chart below shows the stock approaching near term support at $46 (green line), a level that it briefly broke in September. The $42 level on the downside, down about 10% is likely significant long term support (yellow line). On the upside, $50 (red line) was a level that it broke down from after consolidating above it back in Q4:
The company, in this macro environment where threats to global growth are largely perceived to come from the emerging world, is deemed to be defensive given its 100% revenue exposure to the U.S>, and its dividend yield of about 4.5%.
Implied vol in the stock is a bit elevated in the high teens since the company launch a huge debt offering to buy back Vodafone’s nearly 50% stake in VZ wireless, which was recently approved. Vol seems like a sale:[caption id="attachment_36373" align="aligncenter" width="589"] VZ 2 year chart of 30 day at the money IV from Bloomberg[/caption]
So with the stock sitting on technical support, the back drop of a market environment that may once again seek defensive yielders and the relative high levels of implied volatility, I want to do a Buy-Write in VZ.
Trade: Buy VZ at $46.68 and Sell the May 50 call at .50
(e.g. 100 shares vs 1 option)
Profits: btwn $46.68 and 50 make up to 3.32, stock called away $50, but you have collected .50 in premium for the call sale, and will receive a .53 a share quarterly dividend for the stock in early May, effectively selling the stock at $51.03, making the call away level up 9.3% on May expiration. See our discussion on dividends here: http://staging.staging.riskreversal.com/2012/12/12/dividends-and-special-dividends-and-dividend-plays/
Losses: below $46.68 have loses of the stock, which will be off set by .50 received from the call sale and another .53 when the company pays its quarterly dividend in early May, mitigating about 2.2% to the downside btwn now and May expiration.
Rationale: If the stock were to break near term support at $46 I would be inclined to sell the May 42 put to add additional yield to the position as I see that as a level that would be interesting to add to the long stock position. In the meantime I like the set-up in this name of buying the stock and selling calls against it to supercharge potential yield after some selling in the stock.
This is a fairly boring stock and ideally we’d be initiating at $46, but anything down near this level seems like a relatively safe entry.