Tomorrow before the open Verizon (VZ) will report their Q3 results. The options market is implying about a 2.5% one day move tomorrow which is double the average one-day post-earnings move over the last four quarters and above the ten-year average of about 2%.
Shares of VZ are up 4% on the year, massively outperforming AT&T (T) which is down 16% on the year.
Since breaking out to a new 52-week high in August the stock has been consolidating in the low $50s:
Backed out to more than ten years and the five-year consolidation between the low $40s and mid-$50s is fairly obvious:
The stock’s performance this year flies in the face of mixed sentiment among Wall Street analysts with 15 Buy ratings and 19 Holds, and while their 4.4% dividend yield is nothing to shake a stick at many high yielding stocks and groups have taken a breather of late as the yield on the 10-year U.S. Treasury yield broke out above 3%.
So what’s the trade? I am not sure this is a stock that makes a sense to trade, especially into earnings as it does not tend to be a big mover. But If I were long the stock, I might consider a short-term overwrote of my position, looking to take in a little extra yield and create a small buffer to the downside, for instance…
vs 100 shares of VZ long at $54.85 Sell to open 1 Nov 56 call at 75 cents
Break-even on November expiration:
-Profits of the stock up to $56.75, or up to a $1.90 gain or 3.5% gain of the stock price in the next month. If the stock is above 56 on expiration you have a choice to either cover the call for a profit or a loss, depending on where it is or have your stock called away at an effective price of $56.75.
-Losses of the stock below $54.25
Rationale: the likelihood is that VZ remains range-bound, which could mean small gains or losses in the coming weeks. This trade idea looks to add a little leverage by taking advantage of elevated levels of options prices near term given the earnings event and the generally higher levels of implied volatility in the market over the last few weeks.