On January 8, 2012, I wrote an option trade article on AT&T (T) titled, "Call Option Trade on AT&T" and with the Dow Jones stuck around 13,000 and the S&P holding above 1350, investors may wonder if AT&T has more steam to the upside. Whether one wants to buy shares to capture AT&T's 5.8% dividend yield or trade options betting on further upside in AT&T; let's take a look back at the AT&T trade and decide if there is still more room to the upside and how to profit off of this move.
The strategy I recommended was simple and for more examples of simple option trades please click here. On January 8, 2012, I bought the March 28 2012 calls for $2.17 or ($2.17 x 100 = $217 per contract). Currently, If you bought the March 28 2012 calls you could have done nothing since January 8, 2012, and still made money, since the contracts now trade for $2.45 or ($2.45 x 100 = $245 per contract) a profit of $28 per contract. Whether you are new to options or just a beginner, it's nice to have an option trade that you can buy and come back to over a month later and find the trade still profitable (although this isn't the case most of the time). Sometimes high volatility trades can work well in an up or down market, but if you're concerned about the markets, AT&T is a low volatility stock that's worth holding on to.
Since I recommended this trade on January 8, 2012, AT&T had an earnings release on January 26, 2012, and issued a 10-K on February 24, 2012. Whether making a short-term or long-term trade investors should always read a company's 8-K and 10-K if available. In this case some of the things mentioned in the 10-K that I found interesting are operating environment and trends of the business, the stock performance graph on page 28, risk factors and cash and cash equivalents. I would go into more details on the 10-K, but for the sake of time, I am going to focus on trading options on AT&T.
Sometimes AT&T and Verizon (VZ) are like Coke (KO) and Pepsi (PEP). Some people like Coke and some people like Pepsi. Whether you like AT&T or Verizon, investing in either one of these companies would have made you money over a period of time, but the key is who performed better, AT&T or Verizon?
When looking at a chart of AT&T, I would watch the $30.50 level. When looking back on AT&T, investors will notice that twice in January the stock slightly sold off and that has provided an attractive entry point. I believe there is further upside to AT&T, but if you're waiting for a sizeable pullback this may not happen. If $30.50 doesn't hold I would wait for the range of $28.80 to $29.70 and the $29.70 represents almost a 3% sell-off. Taking a multiple of 14 and applying this to FY2012 and this will get you $33.04 as a possible price target. I believe looking at where AT&T topped out at (see chart below) I'm going to stick to my price target of $31.50 and expecting AT&T to get somewhere between $30.80 and $33.04 is reasonable looking forward for the rest of 2012.
Trade 1: Bullish Option Strategy Buy June 16 2012 $28 Call
If you're bullish on AT&T and not concerned about a possible market pullback this trade could work. This call currently costs $264 or (100 x 2.64 = 264 per contract)
Time Horizon: 109 days
Delta on contract: currently at 72
Breakeven: 28 + 2.64 = 30.64 Now subtract from current stock price (30.64 - 30.55 = 0.09)
So all you need is a nine cents move to breakeven and the rest is profit.
Trade 2: Conservative approach
I would do the same as above, but I would wait for a small pullback. We may not see a big pullback, but in the long term I still like AT&T over Verizon, just as I still like Coke over Pepsi! By waiting for a pullback you should be able to get a good breakeven point of 0.08 to 0.12 cents, but at a better price and you can even look at further (deeper) in the money calls.
Note: I am only looking to buy options to replicate a stock's performance. With that being said the dividend does not apply if you are only trading options.
In conclusion, before making an investment please do your homework. This includes reading the 8-K, 10-K and doing a fundamental/technical analysis. Since January, I still like where AT&T is heading and until I see a fundamental change in AT&T, I'm going long on AT&T.