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Daily Data: Verizon Communications Inc. (VZ)

Verizon sold down to the 200 SMA last week as the market sold off further. I think the stock will hold the 200 SMA but if we see continued selling, I cannot imagine VZ trading lower than $40. The $40 level represents the June breakout, which was resistance, now turned support. Fundamentally, however, the current P/E of 38.69 is not appealing when next year's expected EPS growth rate is only 16.26%, and the five-year growth rate is only 9.03%. Despite fundamentals, I continue to be attracted to VZ due to its seemingly oversold daily chart. I turned to the performance of VZ from the October to December option expiration as a reference for a possible new option trade:

Note: I always omit the decimal place in the returns, thus all the 0% returns have been rounded. Above, you can see that based on rounding, VZ has never experienced a negative return over the past 10 years from October to December option expiration. The stock has performed even better in recent years, making the average return of holding this stock during only this time frame 7% since 2002. Based on the worst year, VZ has an implied max low of $44.75 if such "bad" performance were to occur again. The problem is, a worse year could occur. The data above is simply a reference tool I use to see if there may be any seasonality in the stock. Based on the information above coupled with my opinion on the current technicals/fundamentals of the stock, I suggest the following trade:

(click to enlarge)

Option Trade: VZ - Sell Dec'21 40/39 put spread (Bull Put Spread)

(Sell 40 Put/Buy 39 Put)

Size - 5% of Option Spread Portfolio Size = 5 spread)

Entry: Sell Limit: 0.18

Stop Loss: 0.38

Exit Price: 0.00

Max Return: 21.95%

(Max Return Calculated on Return on Risk from my entry, not Return on Margin)

Daily Data: Exxon Mobil Corporation (XOM)

Similar to VZ, Exxon has sold close the 200 SMA. Based on last Friday's close ($86.45), the stock is holding the July breakout level above $86. I think the stock has bottomed for now, as both the breakout level/200 SMA will act as strong support. Additionally, the entire market is overdue for a bounce. Fundamentally, just like VZ, earnings growth is not looking good into next year. Again, the current P/E of 9.13 is a bit rich given that next year's expected EPS growth rate is only 1.54% (five-year growth rate is also just 6.34%). Still, even if the stock is a bit rich in value and the stock market continues to decline further, I do not expect XOM to sell down that quickly due to its low beta of 0.53.

The October to December option expiration date returns for the past 10 years are shown below:

Above, you can see that XOM has performed quite well during this specific time frame. Even 2008 was one of the best years for this stock. With a worst-year posting of a -6% decline, the implied max low is $87.08, which is above the current stock price. Since I do not expect XOM to decline below the 200 SMA over the mid term, coupled with the data shown above, I suggest the following trade:

(Note: We will probably enter this trade next week.)

(click to enlarge)

Option Trade: XOM - Sell Dec'21 82.50/80 put spread (Bull Put Spread)

(Sell 82.50 Put/Buy 80 Put)

Size - 7.5% of Option Spread Portfolio Size = 3 spreads)

Entry: Sell Limit: 0.25 (try 0.30)

Stop Loss: 0.63

Exit Price: 0.00

Max Return: 11.11%

(Max Return Calculated on Return on Risk from my entry, not Return on Margin)

Source: How To Trade Verizon And Exxon Mobil Through December