It’s no secret that 5G technology is one of the most anticipated developments for investors right now. As these companies – both the carriers and the hardware makers – continue rolling this new network out, you’re going to see massive shifts and price movement. And the end of this month should bring the next of these pockets of volatility.
Both AT&T Inc. (NYSE:T) and Verizon Communications Inc. (NYSE:VZ) reports their third quarter of earnings by the end of October. Sprint Corp. (NYSE:S) will follow shortly after.
In the buildout of 5G, this is a crucial period. Verizon, for instance, has landed 5G in 13 markets across the U.S. It expects to reach 30 markets by year-end – a goal since the start of the year.
It’s not so much if it hits its target number of markets as it is the success it sees from the ones it does build.
The early testers of this technology have generally been happy, as long as it is working. CEO Han Vestberg notes that laying the ground floor for this tech takes time. Building out the infrastructure for it is an effort. So, even these early tests need to be taken with a grain of salt.
However, investors are impatient animals. What the company says during its October 25 earnings call will certainly move its stock price.
Considering Verizon’s recent track record of earnings beats and optimistic projections, it could tilt VZ shares upwards in the short term.
Verizon seems to be at the front of the pack on rolling out 5G. It is also taking a slightly different tact compared to its competitors.
You see, instead of focusing just on vast speed improvements or latency advancements with its 5G buildout, the company is developing for all of the different capabilities of 5G.
It is just as focused on consumer advancements as it is on enterprise and business ones. In fact, its commitment to the latter could be what lets its stock breakout above its current price ceiling.
As you can see, Verizon has been struggling to really break through the $60 mark:
If it is able to report large improvements in its 5G rollout to businesses, that could counter the cost problems of the expensive 5G phone prices on the consumer side. Businesses will spend on efficiency where consumers might wait.
However, gambling on what might be said or what improvements Verizon and company might have made in the third quarter is not the best way to play it. Instead, we only have one real “known” entering this crucial period for the industry: something will give.
Whether Verizon offers great outlook or earnings… or it disappoints, we know it will move from its $60 price point rut. It doesn’t even have to be anything Verizon can control. Even if it shows well during its next earnings, its fate is still tied to AT&T and Sprint, which will be reporting at the same time.
What we know now is that any success or failure, at Verizon or elsewhere in the industry, will send shares moving fast.
Fortunately, there is a strategy to take advantage of this increase in volatility without needing to pick a direction. Let’s get into it…
A Strategy For Short Term Volatility
A long straddle is an options strategy that involves buying both a call and a put option on the same stock with the same strike price and the same expiration date.
While on the surface, this seems counterintuitive – to go both long and short on the same company – it takes direction out of the equation. By going both long and short, a surprise to the upside or to the downside is a good thing.
The risk of this strategy is if the underlying shares don’t move at all. With so much riding on these three companies’ third quarter announcements, that’s extremely unlikely. These stocks will move one direction or another… and with a long straddle, you don’t need to know which and still profit.
You can see how this strategy plays out here:
Source: The Options Industry Council
The risk, as noted, is if shares don’t move at all. If that happens, the most the trader could lose is the amount he put down to enter the trade. And that would only happen if shares stay right at the strike price used for the trade.
However, the upside potential is not limited. In fact, the farther away from the strike price the stock heads, the larger the profit for the trader. It doesn’t matter if the stock crashes or rallies, the profit keeps growing.
So, what a trader looks for in a long straddle trade is a strike price right at the current trading price of the underlying stock and an expiration date after the period he expects this increased volatility and price movement. For Verizon, that’s its $60 boundary and November – after all three communications giants report.
Let’s look at a specific trade to see how this might play out…
A Specific Trade on VZ
Right now, a trader can buy a November 15 $60 call on VZ for $1.46 per share and a November 15 $60 put on VZ for $1.38 per share. That works out to a cost per share of $2.84… or a net debit of $284, since each represents 100 shares of Verizon.
That’s the total amount at risk with this long straddle trade. But the trader would only lose that if shares end up on November 15 trading at $60 even. As noted, with all three communication stocks reporting in this period, all with high interest in what has been happening with 5G, that’s unlikely.
Instead, if shares of VZ fall or rally away from the $60 mark, the trader’s profits only grow. Of course, they do have to move a bit before any of those profits are realized.
To find the breakeven profit points for this trade, compare the cost to the strike price. For instance, if shares fall, this trade becomes profitable at $57.16 per share ($60 – $2.84 = $57.16). Likewise, in the case of a rally, this trade enters profit territory past $62.84 ($60 + $2.84 = $62.84).
This represents a move of just 4.7%. On any single day, we could see Verizon shares move in either direction by at least this amount. And with so much investor interest in this upcoming earnings period and the 5G rollout, we can expect a lot higher movement than that.
And the best part is, with this strategy, it doesn’t matter which direction it heads. You’re looking at nearly unlimited profit potential on a near certain period of volatility.