T Stock (AT&T Stock) Put Selling Against Risk

T stock which represents AT&T Stock has been a wonderful performer since I started with T Stock in 2011. On Friday my December $33 naked puts expired out of the money and I am now holding January $32 naked puts on T Stock. In 2012 I have earned $14,500 in income from T Stock. I bought and sold shares twice during the year and the rest of the income was through Put Selling. Throughout much of 2012 Put Selling was easy as the stock was in an upturn for more than half of the year.

Put Selling A Rising Stock

When a stock like T Stock is rising, income earned through Put Selling is commonly above average. This is because selling at the money put strikes or even put selling slightly in the money put strikes can be done since the trend is up and almost always the puts sold will end up out of the money. Even if the naked puts do not end up out of the money in one month, eventually they will because T Stock was rising. As well a rising stock allows me to place more capital at risk which boosts income even more. This is natural since I want to risk my capital in T Stock when there chance of assignment is low and even if assigned shares, I know I can be exercised out of a rising stock. So Put Selling is always wonderfully easy when a stock is rising.

AT&T Inc.

AT&T Inc can be described in one word – huge. With a market cap of $191.2 Billion and revenue of $127.4 Billion no other telecommunications company comes close to AT&T. Verizon Communications Inc. with the stock symbol of VZ has a market cap of $124.3 Billion and revenue of $114.2 Billion. There is a lot to like about both companies but I have preferred T Stock simply because the trend was up, put volumes are very good and the dividend is slightly larger lending a bit more support to T Stock.

Cautious Put Selling Against T Stock

There are now new signals coming from T Stock that are cautioning that my Put Selling strategy needs to be adjusted. The Price To Earning on T Stock is now 43.7 times and the dividend of $1.80 is now at a payout ratio of 232.8 times. Going forward T Stock is not inexpensive. There is no way T Stock will see a dividend cut, and the present dividend supports a yield of 5.35% as of Dec 21 2012.

The dividend yield will help support T Stock as will the fact that AT&T has a consistent record of increasing the dividend annually even it by just pennies. But the PE and the payout ratio are a cause for concern as is the technical chart on T Stock.

Stock Chart of T Stock is the Concern

The stock chart of T stock is technically of growing concern. The chart below shows T Stock in 2012. It has had a very nice run up in valuation. But after being overvalued above $35.00, the stock has tumbled and is now down about 14% from its high.

The downturn has pushed the stock below the 50 day simple moving average, 100 day exponential moving average and this past week the 200 day moving average.

T Stock moving averages

T stock for 2012 and the present moving averages

Worse is that a POINT A, the 50 day simple moving average (SMA) has crossed down and over the 100 day exponential moving average (EMA) and on Friday reached the 200 day exponential moving average (EMA) POINT B.

At point A a strong sell signal was issued on T Stock. At Point B should the 50 day cross the 200 day a new long-term sell signal will be issued.

This simple moving average chart is advising caution and if you look at the stock you can clearly see that AT&T Stock is trying to recover but there is a great deal of resistance to the stock pushing higher.

4 Month T Stock Chart

The decline in T Stock has presented a unique chart as we can see a pattern of lower highs and lower lows which presently is trying to change back to higher lows and higher highs to try to recover or at least not fall lower.

Whether or when T Stock will recover to higher valuations is anyone’s guess, but the chart below assists greatly in understanding the risk level associated with Put Selling against T Stock at present. To continue Put Selling T Stock the $33 and $34 valuations have the greatest potential for return but also the greatest potential for ending up in the money if T Stock cannot get enough support to push higher.

T Stock and Put Selling the decline

T Stock and establishing Put Selling strikes

There is better support in T Stock at $32.00 but real support lies at around $30 on T Stock for Put Selling with very little risk of possible assignment. This is an additional 10% decline in AT&T Stock. Whether that can happen is at this point is anyone’s guess, but for those investors who do not want to have any risk of assignment at higher valuations, T Stock is now presenting risks of assignment from $32 and up. That could change to even lower shortly depending on what happens to the market direction in January.

Put Selling T Stock Strategy Going Forward

The $33 put strike has been wonderful for Put Selling, but it is now too risky for possible assignment. I will be changing to Put Selling the $32 and the $31 put strikes until T Stock begins a new recovery that can be sustained. Once that occurs I can reassess and decide whether to move higher with Put Selling.

The $31 is a prime candidate and any slip below $32.00 will see me aggressively Put Selling the $31 strike. If AT&T Stock should fall below $31.00 I believe there is enough support at the $30 level to allow me to keep rolling naked puts and earn decent premiums while avoiding assignment through rolling before dividend payouts. I believe if T stock should fall below $31, Put Selling at the $31 strike will provide superior returns and I do believe T Stock will easily recover the $31 valuation.

T Stock and Put Selling Above The $32 Put Strike

Put Selling above the $32 put strike at present, while T stock remains in a downturn with clear indications that the stock may fall further is not something I would do unless I wanted to be assigned shares above $32.00.

Investing is about reward and understanding risk. When risk of assignment is clearly indicated an investor needs to recall the original goals of the trade. In my case my goals were clear. I am not interested in owning shares. I am interested in Put Selling for income. The signs of further decline in T Stock are being signaled and should not be ignored. I will be moving lower with my Put Selling against T Stock and looking for larger dips in the stock to enter my Put Selling trades.

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  • nosoup

    BB’s narrowing also.  Look for a break in the new year.