Verizon Offers a 38% Return to Short Term Traders
Trade summary: A bull call spread in Verizon Communications Inc. (NYSE: VZ) using the January $60 call option which can be bought for about $1.60 and the January $62.50 call could be sold for about $0.55. This trade would cost $1.05 to open, or $105 since each contract covers 100 shares of stock.
In this trade, the maximum loss would be equal to the amount spent to open the trade, or $105. The maximum gain is $145 per contract. That is a potential gain of about 38% based on the amount risked in the trade.
Now, let’s look at the details. According to a press release on GlobeNewswire,
“Verizon continues to expand coverage of the 5G service built to be the 21st century infrastructure that will shape the future. Verizon is driving 5G forward by deploying blazing-fast 5G Ultra Wideband service, built using mmWave spectrum, in Akron, OH and Nashville, TN.
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Customers in 57 cities can now experience ultra-fast wireless speeds, reaching up to 4Gbps in some places under ideal conditions, allowing them to download and stream movies and TV shows in seconds, videoconference and collaborate remotely in near real time, and take advantage of new immersive customer experiences never before available wirelessly. By the end of 2020, Verizon plans to launch 5G Ultra Wideband in 60 cities.
“Verizon continues its aggressive expansion of 5G Ultra Wideband service, adding to the growing list of cities with access to the amazing new capabilities this technology brings,” said Kyle Malady, Verizon’s chief technology officer. “Customers in these cities are at the forefront of game-changing technology, with access to download speeds and bandwidth that will power the future of consumer, business and government mobile applications.”
Verizon continues to be a leader in the industry with its 5G Ultra Wideband service – the fastest 5G in the world – that was built from the ground up for industrial and commercial use cases. Verizon’s 5G Ultra Wideband boasts throughputs many times faster than 4G and, as the technology matures, it is expected to handle data volumes 100 times larger than today’s capabilities, and ultra-low latencies, which is the time it takes for a signal to make a round trip from point A to point B. Verizon’s use of mmWave spectrum, the backbone of 5G Ultra Wideband, is essential to these revolutionary capabilities. 5G Ultra Wideband is now available to customers in parts of Akron and Nashville.
Customers in Nashville and Akron also have access to Verizon’s 5G Nationwide network which runs on lower spectrum bands than 5G Ultra Wideband, using an advanced technology called Dynamic Spectrum Sharing (DSS). With Verizon’s 5G Nationwide service, when customers move outside Verizon’s 5G Ultra Wideband coverage area, their 5G-enabled devices will remain on 5G technology using lower bands of spectrum. This new technology maximizes customers’ experience on the Verizon network by allowing customers to use Verizon’s full portfolio of current spectrum resources to serve all customers.
Customers can use Verizon’s network in a variety of ways — from virtual learning to real-time gaming — that requires the ability to allocate spectrum resources in real time.”
VZ is testing support as this news breaks.
On the longer term chart, it appears VZ could be breaking out of a multiyear consolidation.
A Specific Trade for VZ
For VZ, the January options allow a trader to gain exposure to the stock. This trade will be open for about three weeks and allows for traders to turn over capital quickly, potentially compounding gains several times a year.
A January $60 call option can be bought for about $1.60 and the January $62.50 call could be sold for about $0.55. This trade would cost $1.05 to open, or $105 since each contract covers 100 shares of stock.
The amount paid to enter the trade is the largest possible loss on the trade. This is generally true whenever a trader is creating a debit to enter an options trade. “Creating a debit” means there is a cost to enter the trade. You could create a debit by simply buying puts or calls to open a directional trade.
In this trade, the maximum loss would be equal to the amount spent to open the trade, or $105.
The maximum gain on the trade is equal to the difference in exercise prices less the amount of the premium paid to open the trade.
For this trade in VZ, the maximum gain is $145 ($62.50- $60= $2.50; 2.50- $1.05 = $1.45). This represents $145 per contract since each contract covers 100 shares.
Most brokers will require minimum trading capital equal to the risk on the trade, or $105 to open this trade.
That is a potential gain of about 38% based on the amount risked in the trade. The trade could be closed early if the maximum gain is realized before the options expire.
A Trade for Short Term Bulls
As with the ownership of any stock, buying VZ could require a significant amount of capital and exposes the investor to standard risks of owning a stock.
To reduce the risks of a trade, an investor could purchase a call option. This allows them to benefit from upside moves in the stock while limiting risk to the amount paid for the options. However, buying a call option can also require a significant amount of capital and includes the risk of a 100% loss.
Whenever an option is bought, the maximum risk is always equal to 100% of the amount of spent to purchase the option. Since options cost significantly less than a stock, the risk in dollar terms will be relatively small to own an option.
To further limit the risks of the trade, an investor could use a bull call spread. This strategy consists of buying one call option and selling another at a higher strike price to help pay for the cost of buying the first call. The spread strategy always reduces the risk of an options trade.
This strategy is designed to profit from a gain in the underlying stock’s price but the benefit of avoiding the large up-front capital outlay and downside risk of outright stock ownership. The potential risks and rewards of this strategy are summarized in the chart below.
Source: The Options Industry Council
Both the potential profit and loss for the bull call spread are limited. The maximum loss is equal to the net premium paid when the trade is opened. The maximum profit is limited to the difference between the strike prices, less the debit paid to put on the position.
This strategy could be especially appealing with high priced stocks where the share price and options premiums are often a significant commitment of capital for smaller investors.