With the imminent arrival of Apple's (AAPL) new iPhone scheduled to be released next week, AT&T (T) must be as giddy as a small child during the holiday season. AT&T activated more iPhones in the last quarter more than any other carrier. In its Q2 2012 earnings call held on July 24, 2012, AT&T noted that of the 3.7 million iPhones activated in the prior quarter 22% were new customers of the company. AT&T indicated it now has a total of 43 million smartphone subscribers. With Apple's new iPhone about to be unveiled, AT&T should stand to benefit as customers upgrade to the new smartphone. AT&T also noted a large number of customers are choosing the higher tiered plans which means more money in AT&T's pocket every month, as the higher tiered plans are offered at higher price points.
AT&T indicated its revenue drivers are related to mobile Internet growth, U-verse revenue growth of more than 38% and growth in strategic business services. The company noted that 80% of its revenue is now derived from wireless, wire-line data and managed services, up 77% from the prior year. AT&T's U-verse video and broadband offering continues to scale and in wireless, the company's 4G LTE build-out is continuing on track with LTE now in 47 markets.
The company recently closed the sale of its Advertising Solutions (yellow pages) business to Cerberus Capital Management, but retained a 47% equity interest. The new entity is branded as YP Holdings, LLC.
On a negative note, AT&T indicated businesses are currently hesitant and anxious with regard to the upcoming elections, tax law changes and the U.S. federal deficit.
The company's stock price has been ballistic over the last year as shown below:
With the imminent release of Apple's new iPhone and the upcoming holiday season, AT&T's stock price could continue its ballistic trajectory. However, the global economy is slowing as noted by FedEx (FDX), discussed in this article, Caterpillar (CAT) discussed here and Cummins (CMI) discussed in this article. AT&T has some exposure external to the U.S., but unfortunately the company doesn't break out its global revenue, and calls and emails to the company requesting the information have been ignored. With international exposure, it would not be surprising to see AT&T revise its earnings estimates. With this backdrop, an investor might consider a protective position for AT&T.
A couple of protective positions to consider are the collar/protected covered call and the married put. The protected covered positions for a potential return, even if the price of the stock is stagnant, and also protects against a large drop in price. The protected covered call may be entered by selling a call option against a stock and using some of the proceeds from selling the call option to purchase a protective put option. The married put position provides for unlimited upside while protecting against a falling stock price. The married put may be entered by purchasing a put option against a stock with the put option selected far out-in-time in order to reduce the cost of the insurance per day.
Protected Covered Call
Using PowerOptions, a variety of protected covered call positions are available for AT&T as shown below:
The potential returns for the positions in the table above do not include receipt of dividends during the holding time and AT&T's dividend yield of 4.8% is very compelling. The third position in the table looks attractive as it has about the same potential return as the first and second positions, yet has much less time to expiration. The potential return for the third position when including expected dividends received during the holding time, the potential return is 2.5% (20.3% annualized) with a maximum potential loss of 5.6%. So, the maximum potential loss which can be experienced is 5.6%, even if the price of the stock drops all the way to zero. The specific call option to sell is the 2012 Oct 37 at $0.71 and the put option to purchase is the 2012 Oct 34 at $0.24.
AT&T Protected Covered Call Trade
- Buy T stock (existing or purchased)
- Sell T 2012 Oct 37 Call at $0.71
- Buy T 2012 Oct 34 Put at $0.24
A profit/loss graph for one contract of the protected covered call trade for AT&T is shown below:
For a stock price below the $34 strike price of the put option, the value of the protected covered call remains unchanged. If the price of the stock increases to around $41, then the position can most likely be rolled in order to realize additional potential return.
Using PowerOptions, a variety of married put positions for April 2013 option expiration are available for AT&T as shown below:
The top position is attractive with a maximum potential loss of 6%, so even if the price of the stock drops to zero the maximum loss which can be sustained is 6%. However, when considering the receipt of expected dividends, the maximum potential loss is 2.8%. The specific put option to purchase against the stock in order to enter the married put position is the 2013 Apr 38 at $3.50.
AT&T Married Put Trade
- Buy T stock (existing or purchased)
- Buy T 2013 Apr 38 Put at $3.50
A profit/loss graph for one contract of the AT&T married put position, including expected dividends, is shown below:
For a stock price below the $38 strike price of the put option, the value of the married put remains unchanged. If the price of the stock increases above the $38 strike price of the put option, then income methods as described by RadioActiveTrading.com may be used to receive income and reduce risk.
Look forward to hearing your comments below!
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.