On January 23rd, I wrote an article on Verizon. In that article I mentioned a pattern I saw develop over long term in the Verizon chart. Here's what I wrote:
Over the last three years or so, on a weekly chart, we can see a strong bullish pattern in Verizon that backs up the solid performance and management plans others frequently write about. We have a long term stepping pattern here.
- From early 2009 into the summer of 2010 Verizon traded in a zone: (23-27).
- Then it rose significantly through 2010 to about the 34 level.
- That is a 25% increase from the trading zone it had been in.
- From the beginning of January until December of 2011 it traded in a zone again: (34-37).
- The first week of December it broke through its zone and hasn't looked back since.
Next stop, if it continues in the same pattern, is around 46. From there it may trade within a zone again. So at that time I suggested a trade:
In this example, we are going to buy a July 2012 "43" call option (presently prices at $.29) and sell a July 2012 "45" call (presently priced at $.10). This will reduce our net debit almost 30% from $.29 to $.19.
- Net Starting Debit: Premium bought - Premium sold ($.29 - $.10)= $.19
- Maximum Risk: Net debit $.19
- Maximum Reward: Different in strikes - Net debit ($2.00 - $.19)= $1.81
Closed out the trade on Wednesday, June 27th when the stock was trading at 43.88. The original trade was made in January when ti was trading at 38.97. Here are the results.
- Sell July 43 call- $1.10
- Buy the 45 call- $0.16
- $1.10 - $0.16= $0.94
- ($0.94 - $0.19)= $0.75
- ROI- 394.7%
This is a good example of how time decay protection is important when trading debit spreads. When I first identified the play, I did not know when Verizon would move up like I wanted it to. So in January I made my trade 6 months out to give me enough protection against the decay of the option. Six months was just enough. Back when I made the trade, another option I had was to wait a little longer before I made the trade until I saw the stock move up. Either way would have been fine. But this trade is a good example of the importance of judging how long you need time decay protection.
The second observation I learned is that sometimes identifying a chart pattern is important in making a good trade. I realize that patterns do not always work out like we think they will but they are another observational tool I believe it important for us to use. The pattern I saw with Verizon appeared to work out and continues to. It is another tool one should use when considering making a trade.
The Biggest Impact Coming to Verizon
The biggest impact that is coming to Verizon will be the change that has taken place with its billing. If you keep up with telecommunications companies, you will know that they are continually updating the network that customers use as technology continues to evolve. It has expanded from 3G to 4G to LTE. With that expansion comes an evolving way customers use phones now. The smartphone has crested this evolution as we are now downloading information much more than we are using it for minutes or texting. It is only natural that companies like Verizon would have to change the billing to match the use.
Data usage will now cost more while unlimited minutes and texting will remain the same. Changes will eventually benefit Verizon and investors. Generally, customers would pay $90.00 per month getting unlimited voice and text messaging with 1 GB of data for one smart phone. This makes sense since the demand for data is what is on the rise. Other carriers are to follow suit.
Analysts have a mixed picture on Verizon; with only 45% committing to a strong buy position, but almost all believe the stock should be held if an investor owns a position. With this in mind, I am going to look at another options income strategy on Verizon but play it a little closer in than I did before. I am not expecting the stock to move up as fast anymore.
Click to enlarge.
The Options Play
Verizon is presently trading at about 43.88 and we expect it to continue to move up, but not as fast. If the stock continues to move in the same trend, we should have a continued move up but it will be slightly bullish. For this reason we are going to look at a Bull Call Spread but buy the first call (ITM).
- Buy an August 2012 call with a strike of '43' (priced at $1.26)
- Sell an August 2012 call with a Strike of '44' (priced at $0.69)
- Net Debit to Start: $0.57
- Maximum Profit: $0.43
- Maximum Risk: net debit
- Maximum Length of Play: 2 months
Reasoning behind the Play
- Verizon is Bullish and still has a lot of bullishness in it.
- Considering the large dividend and U.S. market (security) money should continue to pour into the stock.
- I am expecting the move up to slow down (for a season) now but not stop.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
