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AT&T Inc. (T) Traders Brace for a Short-Term Slip

Weekly put buyers took charge of AT&T Inc.'s options pits yesterday

by 6/5/2014 9:48 AM
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AT&T Inc. (NYSE:T) puts have traded at a faster-than-usual clip of late. During the past 10 days on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the telecom name has racked up a put/call volume ratio of 1.94, indicating puts bought to open have nearly doubled calls. What's more, this ratio is just 10 percentage points from an annual high, signaling an above-average appetite for long puts (relative to calls) in recent weeks.

While this was not necessarily true yesterday -- as calls outstripped puts, 37,000 contracts to 27,000 -- T's most active option was the weekly 6/6 35-strike put. Nearly 7,900 contracts traded here -- two-thirds at the ask price, suggesting they were bought. In addition, open interest soared overnight, hinting at the creation of new bearish bets -- a theory supported by data from the ISE. According to Trade-Alert, traders paid a volume-weighted average price (VWAP) of $0.21 for the long puts, which expire tomorrow night.

That being said, yesterday's buyers expect AT&T shares -- currently just above the strike, at $35.05 -- to dip below $34.79 (strike less VWAP) by the closing bell on Friday. Gains will accumulate the further below the breakeven mark the stock is sitting at expiration, all the way down to zero. Conversely, the most the traders have at risk is the initial premium paid, should the contracts finish out of the money.

Technically speaking, T has been moving higher since hitting an annual low of $31.74 in early February. In fact, the shares have tacked on 10.4% during the past four months. If this upward trend continues, a capitulation among the option bears mentioned earlier could create tailwinds for the stock.

Finally, AT&T Inc. (NYSE:T) is making headlines this morning. The mobile carrier announced it will test a service allowing credit card issuers to verify the location of their customers, in the hopes of reducing fraud. Also, the U.S. House Judiciary Committee announced it will hold a hearing on Tuesday, June 24, to discuss T's proposal to buy DIRECTV (NASDAQ:DTV).

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