Cash-Secured Puts On Verizon: Boost Income Or Lower Your Price Per Share

Shares of telecom giant Verizon Communications (NYSE:VZ) have returned about 6% over the past year but are flat for 2021. Compared to other tech stock that have seen double-digit returns over the past year, VZ has been a slow mover.

Nonetheless, with its current dividend yield of almost 4.3%, Verizon gets significant attention from fixed-income investors. On Dec. 2, VZ stock hit a record high of $61.95. Currently, the stock is trading just shy of $59.

Verizon Weekly Chart.

In late April, Verizon announced Q1 results. Given the market volatility in recent days, some investors are now wondering whether profit-taking could soon pressure the stock. Others who have not yet invested in Verizon are wondering if they might have a chance to buy into the share price at a cheaper level in the near future.

Today, we look at VZ stock in light of the most recent Q1 earnings and discuss how investors could consider selling cash-secured put options on the stock. Such a trade could especially appeal to investors who want to receive premiums (from put selling) or would potentially want to own VZ shares for less than the current market price. For this piece, we'll use $58.78, which was the price at the time this piece was written.

We previously discussed the mechanics of cash-secured put selling using ExxonMobil (NYSE:XOM) stock. Readers who are new to put selling could consider reviewing that article before reading this one.

Verizon Communications

• Intraday Price: $58.78
• 52-Week Range: $52.85 - $61.95
• Dividend Yield: 4.28%
• Year-To-Date Price Change: Up 0.05%

Verizon serves around 94.2 million phone customers, including 4 million prepaid phone users. According to the most recent quarterly metrics, revenue rose by 4.7% year-over-year (YoY) to $$22.8 billion. On an adjusted basis (non-GAAP), Q1 EPS was $1.31, compared with $1.26 a year ago.

Said CFO Matt Ellis:

“We delivered strong operational and financial performance, giving us positive momentum as we end the first quarter. High quality, sustainable wireless service revenue growth, a recovery in wireless equipment revenues, strong Fios momentum and excellent Verizon Media trends led the way."

In 2021, management expects to achieve an adjusted EPS of $5.00 to $5.15 as compared to $4.30 recorded in 2020. Verizon stock’s forward P/E and P/S ratios are 11.57 and 0.46, respectively.

Let’s now look at how a trader could consider selling cash-secured options on the shares.

Selling Cash-Secured Puts On VZ Stock

Investors who write cash-secured puts are typically bullish on a stock during the timeframe that extends to the option expiry date. They generally want one of two things, i.e., either to:

• generate income (through the premium received by selling the put), or
• own a particular stock, but find the current market price per share (i.e., $58.78 for VZ now) higher than what they'd like to pay.

Cash-secured means the investor has enough money in their brokerage account to purchase the security if the price of the stock falls and the option is assigned.

One put option contract on VZ stock is the option to sell 100 shares. In other words, the seller of the put option should have enough money in their brokerage account to buy 100 shares of that stock at the strike price.

This cash reserve must remain in the account until the option position is closed, expires or the option is assigned (meaning ownership has been transferred).

Let’s assume an investor wants to buy VZ stock, but does not want to pay the full price of $58.78 per share. Instead, the investor would prefer buying the shares at a discount in the next 4-6 weeks.

One possibility is to wait for VZ stock to fall, which it might or might not do. The other possibility is to sell one contract of a cash-secured VZ put option.

As a result, the put seller would take on the obligation to potentially buy 100 shares of VZ at a certain price (the strike price) by the expiry date, and get paid a certain amount of premium now for taking on that obligation.

So the trader would typically write an at-the-money (ATM) or out-of-the-money (OTM) VZ put option and simultaneously set aside enough cash to buy 100 shares of VZ stock.

Let’s assume the trader is putting on this trade until the expiry date of June 18. As VZ stock is currently $58.78, an OTM put option would have a strike of 57.50. The seller would have to buy 100 shares of VZ at $57.50 if the option buyer were to exercise the option to assign it to the seller.

The VZ June 18, 2021, 57.50-strike put option is currently offered at a price (or premium) of $0.72.

An option buyer would have to pay $0.72 X 100, or $72, in premium to the option seller. This premium amount belongs to the option writer (seller) no matter what happens in the future, i.e. until or on the day of expiry. This put option will stop trading on Friday, June 18, 2021.

Risk/Reward Profile For Unmonitored Cash-Secured Put Selling

Assuming a trader would now enter this cash-secured put option trade at $58.78, at expiration on June 18, the maximum return for the seller would be $72, excluding trading commissions and costs.

The seller’s maximum gain is this premium amount if VZ stock closes above the strike price of $57.50. In that case, the option expires worthless.

If the put option is in the money (meaning the market price of VZ stock is lower than the strike price of $57.50) any time before or at expiration on June 18, this put option can be assigned, and the seller would be obligated to buy 100 shares of VZ stock at the put option's strike price of $57.50 (i.e. at a total of $5,750).

The break-even point for our example is the strike price ($57.50) less the option premium received ($0.72), i.e., $56.78. This is the price at which the seller would start to incur a loss.

On a final note, the calculation of the maximum loss assumes the put seller was assigned the option and purchased 100 shares of VZ at the strike price of $57.50. Then, in theory VZ stock could fall to zero.

Once the put seller gets assigned the option, the maximum risk is similar to that of stock ownership, but partially offset by the premium (of $72) received.

Bottom Line

Cash-secured put selling is a moderately more conservative strategy than buying shares of a stock outright at the current market price. But, as seasoned investors would concur, there are no free lunches on Wall Street.

This strategy might be appropriate for investors who want to buy (or at least do not mind buying) high-quality companies at a price that is lower than the current price. In the case of Verizon, those investors who get assigned the shares would become stock owners and also collect dividends.