This Verizon (VZ) Trade Could Help Pay For Your Phone Bill

Even the trade’s “worst-case scenario” isn’t so bad…Today, most of us walk around with little computers in our pockets.

The newest smartphones do everything that our desktop computers did just a few years ago… plus a lot more. From playing video games with your friends to finding a way around traffic on the highway, you can do it all instantly in the palm of your hand.

[ad#Google Adsense 336×280-IA]That added power doesn’t come cheap, though…

And the four major telecom providers – AT&T (T), Sprint (S), T-Mobile (TMUS), and Verizon Communications (VZ) – relay those costs to their customers.

That means we’re paying a lot more each month than we used to.

The average customer of those four companies spends more than $90 per month on his cellphone plan, according to a survey last year from financial-services firm Cowen and Company.

But you don’t have to just keep opening your wallet just to make the cellphone companies richer. Instead, one simple strategy can cut your phone bill dramatically…

Last month, we showed you how to “hedge” your grocery bill and your online-shopping habit. Today, we’re using a slightly more advanced strategy than just buying shares outright.

To “hedge” your phone bill, you’ll sell put options with your cellphone-service provider’s stock. It sounds complicated, but it’s not. The most important thing is remembering how much you’re on the hook for if the trade goes against you.

Let’s use Verizon as an example. Yesterday, shares closed at $48.54.

Today, you can sell one VZ December $48 put option contract for about $0.88. One contract controls 100 shares. For every contract you sell, you’ll collect $88 up front. That’s a 1.8% instant payout on your $4,800 potential obligation (100 shares of Verizon stock).

If Verizon closes above $48 per share on December 16 (option-expiration day), you’ll keep the $88 free and clear. You can then sell another series of put options and repeat the process.

The trade would last seven weeks. That means you can do this same trade about seven-and-a-half times each year. If you did that, assuming everything remained the same, that’d be an extra $660 in your pocket annually. That will pay for more than half of your cellphone bill.

If Verizon closes below $48 per share on December 16, you’ll be obligated to buy the shares. Remember, one put option contract controls 100 shares, so if you sell two put options, you’ll collect $176 ($88 times two contracts), but you’ll be on the hook to buy 200 shares for $48 each. That would cost you $9,600.

That’s why the most important part of this trade is knowing what you may have to pay if the “worst-case scenario” happens… and you have to buy the shares at the strike price.

But remember, if you sell a put for $0.88, you’ll receive $88 up front. That means you’ll still profit as long as Verizon stays above $47.12 per share on December 16 ($48 strike price minus the $0.88 premium).

And as we said, this “worst-case scenario” isn’t so bad. Owning a high-quality company like Verizon at a price that’s 3% lower than where it’s trading today is a bargain. The business is reasonably priced today. Its enterprise value (EV) is less than seven times its earnings before interest, taxes, depreciation, and amortization (EBITDA).

Plus, Verizon has paid dividends to investors every year since 1984. If you’re obligated to buy shares, you will begin receiving that dividend each quarter. The stock now yields about 4.9%. That means for every 100 shares you’ll need to buy at $48 each, you’ll receive about $230 in dividends each year. And you can turn around and sell covered calls on the stock, generating even more safe income.

Even if you are forced to buy shares, the money you earn is cold hard cash you can put toward your phone bill.

Good investing,

Brian Weepie


Source: Growth Stock Wire