AT&T (T) had a newsy week, starting off with their $85.4 billion bid for Time Warner (TWX) followed by their Q3 earnings report which might have highlighted their reason for attempting such a transformative acquisition.
As interest rates have risen from their Summer lows, stocks like T which have been deemed bond proxies given their fat dividend yields have round-tripped much of their gains since the start of the year. Shares of T are now down 16.5% from their 52 week highs made in early July, which accelerated last week on reports of their interest in TWX which would need to be financed by tens of billions in new debt. T may be finding some support just above $36, but the stock is likely to be range-bound as investors wait for regulatory clarity on the TWX bid.
Existing shareholders who have no intention to sell their stock, but also recognize near term gains might be capped for a few reasons (rate headwinds, wireless churn/profitability & deal scrutiny) might consider routinely overwriting their stock by selling short dated out of the money calls.
For instance, vs owning 100 shares of stock at $36.70, an investor could sell 1 Dec 38 call at 35 cents, or about 1% of the stock price. If the stock were to close on Dec 16th expiration at or below 38, up $1.30 or 3.5% from current levels, than the investor would have added nearly 1% yield in a month and a half, or about 6% annualized, on top of T’s quarterly dividend of 49 cents with a current annual dividend yield of 5.34% Overwriting long positions also create a little bit of a buffer on the downside by lowering your cost basis. But in this case at .35, not much, especially given the stock’s recent downward volatility. Another thought for long term holders who might consider selling calls would be to use those proceeds to buy puts or put spreads to slap on some protection.
As far as the buy-write, a long entry on the stock seems like decent risk reward, with near term risk down to about 34 while 40 seems like a decent target on the upside into the new year. Ideally T finds some support after such a sharp drop, and when considering overwriting the ideal situation is that the stock grinds higher towards near term technical resistance up to $38. If that were the case, the short call detailed above can be closed at a gain and rolled higher and out, to the Jan 39s or 40s.