Verizon (VZ): Can You Buy Me Now?

by riskreversal October 19, 2016 1:02 pm • Trade Ideas

Event: Verizon (VZ) reports Q3 results tomorrow before the open. The options market is implying a 2% one day post earnings move, which is essentially in line with the 4 quarter average.

Price Action / Technicals: VZ has doubled the performance year to date, up 9.5%, vs the S&P 500 (SPX) up 4.5%.  I guess just as important as the stock’s gains is the fact that it has sold off about 11% from its 52 week highs made in early July.

As my friend Carter Worth of Cornerstone Research likes to say, “draw the lines anyway you like, but to my eye”, the stock appears to be holding on for dear life above a very important support level of $49.50-$50:

VZ 1yr chart from Bloomberg
VZ 1yr chart from Bloomberg

Back out the chart a bit and draw another line, and it becomes apparent that below current support there is a sizable air-pocket down towards $45, basically unchanged on the year:

VZ 5 yr chart from Bloomberg
VZ 5 yr chart from Bloomberg

My View into the Print: I’d be surprised if results caused an outsized move in comparison to the implied move. On inline or better than expected results I could easily see the stock back at $52. But on the downside, there is little technical support below $49 for another 5-10%.

So what could cause a hiccup? Well, analysts will be most interested in hearing about how VZ dealt with the heavy iPhone 7 promotions from second tier players Sprint & T-Mobile, both who publicly stated they saw great demand for the new smartphone coupled with their trade-up and unlimited plans. Neither AT&T nor VZ had the same enthusiasm, but both were offering heavy phone subsidy promotions for switchers.

Lastly, the stock has clearly been a bond proxy, with its current annual dividend yield of 4.6%, I suspect at some point in the $40s, with a stable fundamental outlook the stock could be a decent scoop on a pull-back as it is my view that while the Fed is very likely to raise the Fed Funds rate at their Dec 14th meeting, they are not likely to embark on an aggressive tightening cycle making stocks like VZ, that are defensive, essentially a utility, with no overseas exposure and a div yield more than 2x the S&P 500, and nearly 3x the 10 year Treasury quite attractive, if fundamentals are stable.

So What’s the Trade?

The annual dividend yield of 4.6% and that can actually be increased with over-writes (turning the stock into a Buy-Write by selling an upside call vs long stock). This is something we’ve detailed in the past with this stock. Here’s a way for those looking to enter at what could be support:

Super Yield

Buy 100 shares of VZ (50.50) and sell 1 Dec 52.50 call at .50

Rationale – This trade idea is only for those looking to enter the stock here or own it lower. The call sale does not act as much of a hedge at all. The implied move is closer to a dollar and with stock and a critical level losses below a 50c move lower on Dec expiration are entirely realized. With that said, if the stock is higher or even unchanged on Dec expiration this can add up to .50 in added yield, which leads nicely into the dividend expected in early January that’s slightly more than .50. Again, this is a good trade for those looking to get in at this level, it’s not defined risk otherwise if the stock moves lower into year end.

What about those that want to be long VZ simply based on technicals and for whom the 57c dividend seems like an afterthought compared to what could be made on a bounce in the stock back towards highs?

Stock Alternative

Buy the Jan 46/52.5 risk reversal for .10

  • Sell 1 Jan 46 put at .60
  • Buy 1 Jan 52.50 call for .70

Rationale – The big thing here is this is sort of swimming against the tide as most people have been buying stocks like VZ for the yield or as a bond proxy. With that trade unwinding a bit, this is more of a stock call at this point. And often better than trying to pick a bottom of the recent move down, you can do a risk reversal in the options where you’re only put the stock lower, or “own it” in the form of a call higher. Anything in between and it’s nothing down and the only thing risked is the .10 paid for the trade. Again, it’s impossible to know whether the stock holds this $50 level, but this is one way to hedge against that possibility as you won;t be put the stock until below 46 (at an effective price of 46.10) on January expiration. There will be mark to market losses on moves higher and lower until then, but no loss needs to be locked in unless the stock is significantly below 46. Doing this trade means you’re perfectly happy with owning VZ at 46.

One wild card in all of this is Verizon has become a bit of a bargain shopper in 2016, most notably announcing a deal to buy Yahoo! (YHOO). Therefore there’s some headline risk in the stock beyond just earnings as any news related to the YHOO deal could mean some volatility in the stock.