This morning Citibank upgraded shares of Verizon (VZ) to a Buy from a Hold, via CNBC.com:
“Since the election, we have become more optimistic on the prospects for tax reform and have been able to better understand the potential benefits for Verizon. We also believe Verizon is likely to see a lighter touch from regulation,” analyst Michael Rollins wrote in a note to clients Tuesday.
“We see an opportunity for multiple expansion given the prospects to improve free cash flow from a combination of expanding its addressable market for revenue, benefiting from potential tax reform, and improving its strategic position through M&A.”
Shares of VZ are up 2% on the news. The stock has had a massive run since its recent lows in mid November, up nearly 19%, the rally seems to be getting a tad long in the tooth, approaching its then high in April, prior to its 10% drop in late May. $54.50 appears to be decent near term technical resistance, while that May low might prove to be decent technical support:[caption id="attachment_69195" align="aligncenter" width="600"] Bloomberg[/caption]
Which brings me to a large options trade today in VZ. When the stock was $54.42, a trader bought to open the April 52.50 / 49 1×2 put spread 25,000 by 50,000 for .25 (rounding up to 25 cents to make the math easy for the post), or about $600,000 in premium.[caption id="attachment_69197" align="aligncenter" width="600"] Bloomberg[/caption]
This trade, if an outright bearish bet breaks-even at $52.25, offering gains of up $3.25, or $8.1 million between $52.25 and $46.25, with the max gain at the short put strike at $49. The worst case scenario is that the stock is below $46.25 on April expiration and the trader would suffer losses on the equivalent of 2.5 million shares.
Again, looking at the chart above, the Nov low very near $46 should serve as support.
Our usual disclaimer, without intimate knowledge of the trade or the trader’s intent it is impossible to glean anything meaningful. For instance it could be a low premium bearish bet, or it could be a hedge against a long position. Regardless it got me looking at the stock and the reasons for today’s brokerage upgrade and subsequent price action. I suspect the upgrade is late and the rally likely to peter out soon.