AT&T(T): Buy it Write

by Dan August 18, 2017 3:13 pm • Trade Ideas

Back in July, I took a look at AT&T (T) after a sharp selloff in the shares to a new 52 week low, which marked a nearly 17% decline from its 2017 highs made in January. Given what I viewed as cheap valuation, poor sentiment, cheap valuation and potential positive catalysts I bought stock with an eye towards selling a call on a bounce to create an overwrite. From July 19th:

I am buying a little stock here at $35.82 with an eye towards averaging down a little, and strongly considering routinely selling a month out 3% out of the money call to super yield this mofo as we get more clarity on the likelihood of approval of TWX, and event that would make this stock a must own in my opinion.

The stock did indeed bounce and on July 31st, with the stock 39.10 we looked to September to create an over-write:

The stock bounced pretty sharply on their recent earnings report and now with the stock 39.10 it makes sense to start looking to add that super yield in the form of call sales. The most obvious call sale at the moment is in September, where the 40 calls can be sold at .38, giving the stock a little more room to the upside here but adding some decent yield if the stock goes sideways or slightly down. It essentially lowers the cost basis on the original stock purchase.

Since I bought the stock in July there have been a couple fundamental develops that caused the stock to rally 10% in a straight line in a matter of days. First, on July 25 the stock rose 5% the day after reporting Q2 results that across the board on eps, sales and net adds. And yesterday the WSJ reported that “the government review of AT&T Inc.’s $85 billion takeover of Time Warner Inc. has reached an advanced stage”, which the eventual closure of the proposed deal is the primary fundamental reason I bought the stock in the first place.

The stock has since retraced about half of the move, now trading $37.50 and those Sept 40 calls are now worth only .05. Also, with the sudden return of volatility, investors may be looking for some places to hide, with dividend paying stocks replacing some of the riskier portfolio pieces that have outperformed so much in 2017.

The stock is down in August and probably and even with a move down to prior lows near 36 it’s likely to start seeing some buyers and 36 should act as support and can be used as a stop. Therefore we like the idea of rolling the over-write or for those looking to hide out a bit as well, initiating a buy-write here.

So What’s the Trade?

For the existing trade, the action is simply to buy to close the Sept 40 calls and sell to open the Oct 39 calls at .38. further lowering the cost basis on the initial entry.

Or starting here….

AT&T (T – $37.50) Buy-Write, buy 100 shares for $37.50, Sell to open 1 Oct 39 call at 38 cents.
Break Even on Oct expiration:
  • -Profits of stock up to 39 of 1.50, if stock 39 or lower receive 38 cents in premium or 1%, annualized that’s a 6% yield (on top of the stock’s current 5.2% annual dividend yield). Also, the stock will pay a 49 cent dividend in Oct, or 1.3%, so that can be considered an additional buffer to the downside.
  • -Losses of stock below 37.50, less 38 cents buffer from call sale and 49 cent quarterly dividend, so really losses below $36.63, just above the identified technical support level.