Bears stalk telecom laggard
09/19/17

Does a rising tide lift all ships? Traders say it depends on the sector.

If you provide technology goods and services like chips and software, then the answer has been yes: This year’s 12 percent rally in the S&P 500 has definitely floated your boat. Ditto since the spring if you’re a global name. If you're involved in a growing industry like health insurance or aerospace, the bullish run has stretched back to more than a year.

Big telecom hasn’t been so lucky. It’s been under siege all of 2017, with the NYSE North America Telecom Index crumbling more than 5 percent since January. Yesterday options traders looked for the biggest name in the sector to take another turn to the downside:

  • Going to work less than an hour after the opening bell, they bought 22,5000 November 39 puts in AT&T (NTSE: T) for $2.44. Owning puts fix the price where a security can be sold, so they tend to make money when a stock falls.
  • They also sold 22,5000 November 35 puts for $0.44. This is the mirror image of the other trade, generating an upfront credit and binding the investor to buy shares if they decline to a certain level.
  • Combining the strategies is known as a vertical spread, letting the investor use money from one leg to cover the cost of the other. In this case, they paid a net $2 ($2.44 - $0.44), and will collect $4 if T closes at $35 or lower on expiration.
  • T rose 0.86 percent to $37.42 yesterday. It only needs to drop 6.5 percent to $35 by expiration for the put spread to double in value. Breakeven’s at $37 and the whole position will go worthless if the shares rally back above $39.
AT&T (T) 3/23/17 - 9/18/17 chart

Source: OptionsHouse by E*TRADE.

Income investors have stood in disbelief as the telecom giant skidded lower over the course of 2017. After all, they protest, interest rates have fallen back near long-term lows. Doesn’t that draw anyone to the company’s juicy 5 percent dividend yield?

Hardly, said the bears. They point to the company’s steady loss of old wireline customers and the accelerating pace of Americans “cutting the cord" on cable.1 Then there’s also business disruptions in Texas after Hurricane Harvey.2 Some skeptics might additionally ask whether homeowners rebuilding will even bother to restore some of those older services.

Other naysayers see problems on T’s balance sheet: Over $100 billion of problems in the form of net debt, to be more specific. They know shareholders will be forced to pay the piper if its key telecom and cable-TV services keep struggling.

And then there’s the Federal Reserve. Most economists expect central bankers to tighten policy by selling bonds after their meeting tomorrow.3 That has the bears wondering: If a dividend stock like T has declined when interest rates are low, what will happen should they rise?

Bottom line: T has lagged the market this year, and some traders see further downside.

 

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1. Business Insider: REPORT: People are ditching cable at a faster clip than previously thought. 9/13/17.

2. Bank of America Merrill Lynch: 2017 Telecom & Media Conference Highlights – Day 1. 9/18/17.

3. Bankrate.com: Why you shouldn’t snooze through this week’s Federal Reserve meeting. 9/18/17.