AT&T (T) got hammered yesterday after their disappointing earnings call. I thought the beating was a little bit of overkill and looked to the puts column for a path to profit. I expect the downside from the new lower levels to be somewhat limited based on the dividend yield. The forward dividend yield is 4.6%. That’s not in jeopardy of being cut any time soon from what I can tell. I placed a limit order yesterday to try to catch any further weakness, but that was about the time it bottomed. As of this morning, my order was far from executing, so I cancelled it and raised my strike by a dollar. While T was trading at $37.32, I sold three T July $37 naked puts for $1.12 each and received $334.83 after paying $1.17 in commission.
If the 300 shares are assigned, my cost per share will be $35.88. Assuming the dividend stays as it is, I’ll earn a 5.01% yield on my 300 shares and will add to that with out-of-the-money covered calls. This isn’t built to be a huge moneymaker for me, but I consider it relatively low risk after it fell from $39.00 just a few days ago. The first key level of potential support to watch will be at yesterday’s low, $36.63. After that, the round numbers – $36.00 and then $35.00 become the spots to watch.
$36.03-36.02 acted as support March 19th and 21st. Stronger support has been proven just above $35.00. T came within 10 cents of $35.00 seven times in the first three weeks of February. I don’t think the recent revenue miss for T is going to sink the stock below this bottom support. As I mentioned, my first attempt at T naked puts was for a dollar lower than my actual $37 strike. That would’ve put my cost per share below $35.00. Since I expect support to hold at $35 or 36, I’m not worried about it dipping below my cost per share, because it should bounce from there, hopefully while I own it.
To add to the positive signs of support not too far away, I added in a look at the Fibonacci Lines. A 50% retracement of this rally (1/18/13 to 4/23/13) would offer support at $35.86, close to my $36.00 target for support and only two cents below my cost per share. If it keeps falling, the 38.2% retracement is at $35.12. That’s in a great place for it to bounce from and still get above my strike before my contracts expire in three months. The 200-day moving average is around $35.85 and ascending. Throw all of that together and I’m not terribly worried. In fact, I have another limit order open in my IRA to trigger another trade if T gets to around $36.50.
If I’m not assigned these puts, I’ll make a 3.1% return on my money at risk. That’s only 13.0% annualized, but I don’t actually have money set aside for this order. I’m over 100% invested now and any gains I make from this and future trades are gravy (and the losses are compounded). That’s one of the main reasons I was willing to take a lower annualized return. This isn’t the time to get too risky with high beta stocks/ETFs. I have a 3.74% cushion before this turns into a losing trade. That would put T 7.98% below its recent high of $39.00. Of course, it can fall more than that and I’m aware of the risk, but I’m trying to think longer-term with this trade and (at least for now) can stomach taking the assignment and turning it into a long-term position. With Interactive Brokers’ low margin rates, I’m not risking much by buying a stock that will yield 5%, assuming T recovers at some point.