AT&T: Playing the Options

 |  About: AT&T Inc. (T)
by: Dan Braem

It is very tough to find stocks that you can invest in over a long period of time. Quite frankly, as we have witnessed, most companies are so poorly run that the companies don’t deserve long-term shareholders. However, I believe there are some businesses that are attractive on a long-term basis at the right price.

One of those businesses is wireless services. Specifically, I am looking at AT&T (NYSE:T). Currently, the company trades for around $26 per share, giving AT&T a 150+ billion market cap. Most noticeably, AT&T sports a 6% yield at current prices.

Although the wireline business is facing some pressure, the wireless business is strong. At a $150 billion market cap, AT&T has generated over $10 billion in free cash flow over the past two trailing calendar years.

Like most people, I like to buy things cheap. In this case, I would love to buy AT&T at $17.50. That is a significant discount to the current price of $26, and assuming the dividend wasn’t cut, would give AT&T a yield of close to 9%.

The way I would play this is to write the January 2011 $17.50 puts for a premium of $.90 each. In other words, I would collect $90 per contract in premium. In return, I have the obligation to buy AT&T at $17.50 should the price ever reach that level between now and January 2011.

Let’s be honest. AT&T has a very remote chance of hitting $17.50. That would be ok – I would get to keep all my premiums should the stock never reach that level. If AT&T hits $17.50 or goes below, I would get to buy this company at a bargain price. I don’t see anything in AT&T’s business model that would radically change over the next year and a half – so I am ok with buying the stock cheap.

Please keep in mind that when dealing with options, it is important to not get overleveraged. Just ask the boys at AIG.

In the past, I have recommended writing puts on CNA at $7.50. Those puts were set to expire in January 2010. The stock is now at $24. That is a major win. I see a similar win for the AT&T puts.

Full disclosure – Just wrote these puts on 8/26/09.