Verizon, a dependable stalwart dividend stock, has been healthy all through our economic turmoil and looks to continue to grow through 2012. We believe Verizon is one of the best stocks for investors who are looking for long-term investments but like using options instead of (or along with) buying the stock.
Verizon Communications Inc. (VZ) provides communication services. The company operates through two segments, Domestic Wireless and Wireline. The Domestic Wireless segment offers wireless voice and data services, and sells equipment in the United States. The Wireline segment provides voice, Internet access, broadband video and data, Internet protocol network, network access, long distance, and other services in the United States and internationally.
Todd Johnson, the No. 1 writer on Seeking Alpha for Dividend Ideas, recently wrote a great article on Verizon. In this article he wrote about a few examples of Verizon's long term growth strategies. One was an acquisition to integrate cloud technology into smart phones, and the other was buying additional advanced wire services that would provide help in the growing mobile markets. A strong article I would recommend to all to read. It paints a strong picture just how solid Verizon is as a company.
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Over the last three years or so, on a weekly chart, we can see a strong bullish pattern in Verizon that backs up the solid performance and management plans others frequently write about. We have a long term stepping pattern here.
- From early 2009 into the summer of 2010 Verizon traded in a zone: (23-27).
- Then it rose significantly through 2010 to about the 34 level.
- That is a 25% increase from the trading zone it had been in.
- From the beginning of January until December of 2011 it traded in a zone again: (34-37).
- The first week of December it broke through its zone and hasn't looked back since.
Next stop, if it continues in the same pattern, is around 46. From there it may trade within a zone again. Knowing how Verizon moves, here are two longer=term trading strategies using options one might consider.
Bull Call Spread
This is a vertical spread strategy that creates a debit to start off with. The investor buys a "near the money" long term call and sells a higher strike call with the same expiration date. The thinking behind this strategy is to bring down the cost and breakeven point in the trade compared to simply buying a long call. This strategy is more suited for long term option trades and that is just what we are looking for with Verizon.
In this example, we are going to buy a July 2012 "43" call option (presently prices at $.29) and sell a July 2012 "45" call (presently priced at $.10). This will reduce our net debit almost 30% from $.29 to $.19.
- Net Starting Debit: Premium bought - Premium sold ($.29 - $.10)= $.19
- Maximum Risk: Net debit $.19
- Maximum Reward: Different in strikes - Net debit ($2.00 - $.19)= $1.81
With a risk level at $.19 and a reward level at $1.81, this longer term options strategy offers good opportunity for the investor who likes using options. Verizon is a strong company and we expect it to continue to rise through 2012 and reach its next level of 46 possibly by mid or end of summer this year.
Disclosure: I am long VZ.
Additional disclosure: VZ, Options
