On June 22nd we detailed a way to fade what I thought was too much too soon for shares of Verizon (VZ) as global bond yields continued to tumble causing an insatiable bid for defensive equities like U.S. Telco that lack overseas exposure and sport fat dividend yields. The idea at the time was simple, Britons would vote to remain in the EU, US data would chug along, expectations for US rate hike would increase (although I did not think they would actually raise) and defensive yielders like VZ would sell off.
Well wrong entry for whatever reason when it comes to trading is just wrong all together. Here was the trade from June 22nd:
VZ ($54.20) Buy the July/Aug 52.5 put calendar for .50
- Sell 1 July 52.5 put at .55
- Buy 1 August 52.5 put for 1.05
Rationale – This is a mildly bearish trade up to July expiration as it targets a slight pullback to 52.5. After July expiration it can either be closed or rolled to maintain the bearish positioning in August.
VZ has now broken out to new 52 week highs and nearly 10% from the trades break-even on August expiration. With the short put in July worth a little less than a dime, and the August having lost two thirds of their value, the position is nearing our mental 50% stop for long premium trades.
Action: Sell to Close VZ ($56.50) July August 52.5 put spread at 28 cents for a 22 cent loss.
-Buy to close 1 July 52.50 put for 7 cents
-Sell to close 1 Aug 52.50 put at 35 cents
Rationale: The idea was simple, fade the breakout and finance the purchase of a longer dated near the money put. The breakout makes the likelihood of a merely a break-even on the trade very unlikely, its time to cut our losses while there is still premium left in the trade to do so.