Filed under: Deals, Bad news, Industry, Sprint Nextel Corp (S), Verizon Communications (VZ), Options, Technical Analysis
Verizon Communications (NYSE: VZ) shares are falling after competitor Sprint Nextel (NYSE: S) announced it will collaborate with Clearwire (NASDAQ: CLWR) to form a $14.55 billion communications company. The new company will be named Clearwire, and will establish a mobile network based on the emerging WiMAX standard, which VZ has declined to adopt. If you think this stock won’t be rising too far in the coming months, then it could be a good time to look at a bearish hedged play on VZ.
After hitting a one-year high of $46.24 in October, the stock hit a one-year low of $33.00 in March. This morning, VZ opened at $38.47. So far this day the stock has hit a low of $38.09 and a high of $38.72. As of 12:10, VZ is trading at $38.67, down $0.22 (-0.6%). The chart for VZlooks bullish and steady, while S&P gives the stock a positive 4 STARS (out of 5) purchase rating.
For a bearish hedged play on this stock, I would think about a July bear-call credit spread above the $42.50 range. A bear-call credit spread is an options position that combines the buy and sale of call options to hedge risk in case the stock doesn’t do what you think but still leverage nice returns. For this particular trade, we will make an 8.7% return in ten weeks as long as VZ is below $42.50 at July expiration. Verizon would have to rise by more than 9% before we would begin to lose money. Learn more about this type of trade here.
VZ hasn’t been above $42.50 since January and has shown resistance around $40 recently. This trade could be risky if the US economy stages a recovery in the next few months, but even if that happens, this position could be protected by resistance VZ might find at its 200 day moving average, which is currently around $41 and falling.
Brent Archer is an options analyst and writer at Investors Observer.
DISCLOSURE: Mr. Archer owns and/or controls diversified portfolios of long and short stock and option positions that might include holdings in companies he writes about. At publication time, Brent neither owns nor controls positions in VZ, S, or CLWR.
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