Verizon has been trading in an increasingly tight range over the last six weeks. Chances are, it will break out of this range at some point soon.
One way to profit from a breakout is via a strategy called a long straddle. It is constructed through buying an at-the-money call and an-at-the-money put.
Buying at-the-money options can be expensive. They will also suffer from time decay, meaning that they will lose a little bit of value with each day that passes if the stock doesn't make a big move.
With a long straddle, the further out in time the trade is placed, the slower the time decay. But the options are more expensive and require more capital.
Setting Up Verizon Stock Trade
A long straddle could be placed on Verizon stock by buying a 40-strike call and put for the April 26 expiration. The call was trading Wednesday around $1.25 and the put around $1.30.
Verizon earnings are set for around April 22. So the April 26 options should hold their value fairly well, even if the stock stays flat.
When we add the two together, the total cost of the trade would be around $2.55 per contract, or $255. This is the total amount of risk in the trade and the maximum that could be lost.
The break-even prices are calculated by taking the strike price plus and minus the cost of the straddle.
That gives us break-even prices of 37.45 and 42.55. But profits can be made with a smaller move if it comes earlier in the trade.
For example, the estimated break-even prices at the end of June are around 38.70 and 41.80.
How Volatility Affects Verizon Stock Trade
Changes to implied volatility will have a big impact on this trade and the interim break-even prices. So it's important to have a solid understanding of volatility before placing a trade like this.
The worst-case scenario with this Verizon stock long straddle would be a stable stock price. That would see the call and put slowly lose value each day. For a long straddle, I usually set a stop loss at around 20% of capital at risk. That would be around $50, and a profit target of around 40%.
I would also look to close the trade by the end of March if a big move hasn't occurred by then.
The trade starts with theta of minus-6. That means it will lose roughly $6 per day from time decay, with all else being equal.
Verizon Stock A Leader In Its Industry
According to the IBD Stock Checkup, Verizon stock is ranked No. 2 in its industry group. It has a Composite Rating of 64, an EPS Rating of 52 and a Relative Strength Rating of 68.
It's important to remember that options are risky and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ
