It’s only apt to discuss AT&T (NYSE:T) during the week where the headlines are flying about breaking up great American companies like Facebook (NASDAQ:FB), Amazon (NASDAQ:AMZN), Alphabet (NASDAQ:GOOGL) and even Apple (NASDAQ:AAPL). Back in the day, T stock was the giant to break up.
Today I share the opportunity to trade T stock inside a range. So I could consider this on a tactical trade but one that I don’t mind turning it into an investment if price goes against my assumption.
But first let’s consider the fundamentals.
AT&T stock is cheap in absolute term as it sells at a 12 trailing P/E ratio. This is a little bit cheaper than Verizon (NYSE:VZ) and almost twice as cheap as T-Mobile (NASDAQ:TMUS). AT&T even pays a fat 6% dividend which is not in jeopardy.
So clearly owning AT&T stock at these levels is not going to result in a financial debacle. And that’s the main reason that I don’t mind turning this trade into an investment. I get to own a quality stock that pays me a strong dividend while I ride out any trouble.
Trading T Stock
So now the opportunity at hand. Although it’s up about 11% year to date and in line with the S&P 500, the price action in this stock has been choppy. Since the October correction started, every time T stock approaches the area from which it fell, the sellers pile into the stock to cause the rallies to fail.
This established a roof which is frustrating to the AT&T bulls but it also created an area of opportunity. One of these breakout attempts will eventually succeed and the roof will turn into a launching pad.
So I could buy the shares now and hold it with a stop below. But why is now different? Energy!
The short-term range is tightening into a pinpoint. The stock is bouncing off the $30.40 low and has strong momentum as it approaches the descending trend line. So we have lower highs and higher lows meeting at a point. This usually creates tension in T stock that needs to resolve itself in a breakout in either direction.
My bet is that this time and since the markets in general are also rallying, the direction of the AT&T move will be UP. If so then the rally should target $35 per share. But there will be resistance lines along the way at $32 and $32.60. If the bulls can beat $33.10 there is open air above.
This won’t be easy because this is whole region is a pivot zone that dates back to 1996. This is another reason why I don’t mind holding the shares even without a stop loss because the bottom cannot be too far below current price if I am wrong.
The plot twist: Options can give me the edge here for better execution.
To mitigate the risk I can use options to generate income from the support that is below T stock price this month. While I hold the shares I can sell the January T $28 put and collect $1 per contract. This lowers my out of pocket expense.
But if T falls below $28 this year than I own more shares but at a breakeven price of $27 per share. For perspective, this would be an entry point as low as the December lows and we all know that it was a special bearish case then.
The bottom line is that AT&T stock has value here, so it’s cheap. I’d like to own it while it resurfaces above a 23-year-old pivot zone. Once above, it will be bullet-proof support and a base for a monster rally.
But I recognize that we are still in the throws of an economic war so I have to expect volatility from political headlines.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. Join his live chat room free here.
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