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Option Brief: AT&T Inc. (NYSE:T) has surrendered more than 8% in 2014, and has underperformed the broader S&P 500 Index (SPX) by more than 11 percentage points during the past three months. In fact, the security touched an annual low of $31.74 earlier this month. Nevertheless, option traders continue to wax optimistic on the telecom concern, with T calls changing hands at a faster-than-usual clip today.
In afternoon action, T has seen roughly 57,000 calls cross the tape -- an 82% mark-up to its average intraday volume, and more than double the number of puts exchanged. Attracting the most attention is the May 34 call, where north of 15,600 contracts have traded, primarily at the ask price. Volume has exceeded open interest at the strike, and implied volatility is trending higher, pointing to newly bought bullish bets.
By purchasing the out-of-the-money calls to open, the speculators have one of two motives: to hedge their short positions (short interest represents more than a week's worth of pent-up buying demand, at T's average pace of trading), or to bet on a recovery north of $34 within the next few months. In the case of the latter, the "vanilla" call buyers will begin to reap a reward if T rallies north of $34.26 (strike plus the volume-weighted average price of $0.26) by the close on Friday, May 16, when the options expire. From AT&T Inc.'s (NYSE:T) current perch of $32.22, it would take a rebound of 6.3% in order for the shares to conquer breakeven. Risk, meanwhile, is limited to the initial premium paid for the contracts, should T remain south of the strike through expiration.