Analyst: Sell This Overbought Telecom Stock

CTL's 10-day moving average could contain today's sell-off

Aug 22, 2018 at 3:03 PM
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Wall Street has been quick to dole out sell ratings today. CenturyLink, Inc. (NYSE:CTL), for instance, was downgraded to "sell" from "neutral" at MoffettNathanson -- which also underscored its $19 CTL price target, a roughly 20% discount to last night's close.

The brokerage firm suggested the telecommunications stock had rallied too far, too fast, with investors not pricing in potential synergies struggles. As such, CTL stock is trading down 5.6% at $22.65, on track to snap a nine-day win streak -- its longest since April 2017 -- that lifted the shares to a new annual high of $24.20 yesterday.

Exacerbating pressure from the bearish analyst note is the fact that CTL stock was overbought heading into today's trading, per its 14-day Relative Strength Index (RSI) -- which closed last night at 86. Nevertheless, the security remains 365 higher year-to-date, and appears to be finding support today near its rising 10-day moving average.

ctl stock daily price chart aug 22

It looks as if options traders have been anticipating a pullback, too. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), CTL's 10-day put/call volume ratio of 0.71 ranks in the 85th annual percentile -- meaning puts have been bought to open relative to calls at a quicker-than-usual clip. Given the security's long-term technical strength, it's possible some of this activity is due to shareholders hedging against any downside risk.

Regardless, it's a prime time to buy premium on CTL options. Schaeffer's Volatility Index (SVI) for CenturyLink is currently 25% -- registering in the 6th annual percentile. In other words, short-term options are pricing in lower-than-usual volatility expectations at the moment.

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