Time to Buy Protective Puts on Verizon Communications Inc. (VZ)?

Verizon Communications Inc. (VZ) puts are priced at a bargain relative to calls, as the stock's shares stare up at resistance ahead of earnings

Jan 10, 2017 at 1:01 PM
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Verizon Communications Inc. (NYSE:VZ) has been making headlines today,on news that Yahoo! Inc. (NASDAQ:YHOO) CEO Marissa Mayer will step down from the board -- and YHOO will change its name to Altaba -- following VZ's planned purchase to buy YHOO's core internet assets. Ahead of earnings later this month, and with VZ shares backing away from familiar resistance on the charts, the current options backdrop suggests VZ shareholders may want to consider protective put options as a way to hedge their bets.

Looking back at VZ over the last several years, the shares have repeatedly peaked in the $54-$56 zone. In fact, the stock topped out at $54.83 last week, and is currently trading at $53.11.

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What's more, VZ has typically not performed well during the first year of a presidential cycle. Since 2005, VZ has averaged a loss of 4.8% over this time frame, ending in the red more than 66% of the time, making VZ one of the worst performing S&P 500 Index (SPX) stocks to own during the first year of a presidential cycle. When this is taken into account along with recent price action, it looks like a cautious approach towards VZ shares is preferable. Analysts seem to agree, with just 36% rating the shares a "buy" or better.

In addition, VZ's 30-day implied volatility skew of 12.6% is in the bottom 2% of its annual range. This indicates short-term VZ puts have rarely priced in lower volatility expectations relative to VZ calls. This suggests the options market is very complacent on the prospect of potential downside for VZ over the next month of trading.

Meanwhile, VZ's Schaeffer's Volatility Scorecard (SVS) is currently sitting at an elevated 99, indicating the blue chip has tended to greatly exceed volatility expectations over the past year. With puts priced cheaply relative to calls, and with VZ shares facing technical resistance on the chart, as well as its tendency to underperform during the first year of the presidential cycle, current Verizon Communications Inc.'s (NYSE:VZ)  shareholders may want to consider a pre-earnings hedge with put options.


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