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Spanish telco Telefonica (NYSE:TEF) has come up in a number times on Seeking Alpha, most recently in an article by Carla Pasternak, suggesting that investors will do well to consider some of the high dividends available from various companies located in PIIGS countries. Telecom is not popular right now, and when adding to that the general risk aversion on Greece, Spain, Portugal etc. it creates a contrarian value opportunity.

At today's price in the 59.50 area, the company trades at a P/E of 8.54 and yields a dividend of 8.43%. The company recently reported earnings, a small increase in EPS and revenue, less than the street expected. Shares have been trading down 2 or 3% and volatility seems high for a dividend payer. Long term debt as a percentage of capitalization is higher than I prefer, at 60.6%, but seems acceptable for an industry that is similar to a utility.

Implied volatility on options is high compared to what would normally prevail for a stock of this type. A covered straddle strategy makes sense to me: I was able to buy the shares for 59.40 and receive 10.23 selling the September 60 straddle.

(Click to enlarge)

The strategy returns 48% annualized if the shares are called away at expiration, assuming some funds are set aside as a reserve to meet the put obligation. It breaks even at a share price of 54.58, at which point the investor has a 9% dividend as a consolation while holding and waiting for prices to recover.

Disclosure: Author long TEF as described in article

Source: Telefonica Options Stategy: Covered Straddle