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Verizon Communications Inc. (VZ) Offers Bullish Traders 10.55% Per Annum Return With This Option Strategy

Shares of Verizon Communications Inc. (NYSE:VZ) have been punished in the last few weeks on the back of an earnings miss. The company was expected to report earnings of $0.86, but fell short of that estimate by $0.03. However, the company did report a 1.9% growth in wireless retail connections.

The market wasn’t impressed and as a result the stock has dropped 11.7% from $54.80 down to $48.40.

Verizon has long been a favorite for dividend hunters and this recent decline has seen the yield on the stock rise to 4.7%. That is sure to attract some interest shortly.

Dividends have long been proven to generate a large portion of total stock market returns and Verizon has been a buy and hold safe haven for years.

Northfoto / Shutterstock.com

Northfoto / Shutterstock.com

One analyst believes Verizon is “the very model of a stock you buy for income…. This means when the stock becomes oversold… you buy. Then you hold and enjoy the yield.”

However, this analyst believe Verizon is overvalued and should be priced around $37.

Cautious investor may want to wait for the recent selloff to play out before jumping in.

The chart of Verizon Communications Inc. (NYSE:VZ) quite frankly looks pretty awful. It may take some time for the damage to be resolved.

The recent gap lower has seen the stock drop below the 200 day moving average. Generally this is a bad sign and something that may prevent money managers from investing in the stock.

There is a clear level of support at $45.50 so the stock should stay above that level in the short term.

VZ

Investors looking to take advantage of the recent selloff and rise in dividend yield, can do so by selling cash secured puts.

Currently, the April 21, 2017 $47 puts are trading for $1.06. Investors willing to buy Verizon for $47 can sell this put and only need to take ownership of the stock if it falls below $47 by April 21.

If Verizon closes above $47 on April 21, the investor keeps the premium and can sell another put, or move on to another opportunity. By keeping the $1.06, the investor would made a 2.26% return in less than 3 months which equates to 10.55% per annum.

If Verizon Communications Inc. (NYSE:VZ) does drop below $47 and the investor is forced to purchase the stock, the effective purchase price is $45.94 thanks to the option premium received. This brings the effective yield to 4.95%, not bad in this era of low yields.

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Options trading involves risk and is not suitable for some investors. Check with your financial advisor before making any investment decisions.

Disclosure: I am currently long VZ

Note: Gavin has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. He likes to focus on short volatility strategies. Gavin has written 5 books on options trading, 3 of which were bestsellers. You can read more from Gavin at Options Trading IQ.