AT&T (NYSE: T) seems to be at a crossroads. On the daily chart, the stock is resting just above its 50-day moving average and seems like it is ready to rally. AT&T stock is oversold based on the daily stochastic readings making a bullish crossover. However, when we look back to December, the stock was in the same position—hovering above its 50-day moving average, the stochastic readings made a bullish crossover. That seemingly bullish setup didn’t help the stock much as it broke below the trendline and then dipped a little further before rallying back up to the moving average and then dropped for another month.
AT&T stock could go either way at this point. The weekly chart shows that the stock just hit resistance at the $37 level and is sitting in overbought territory based on the weekly stochastic readings. There is support to the downside at the $31.50 area should the stock break the support of the 50-day moving average. If the stock were to breakout above the $37 level, there isn’t anything to hold it back as that is the all-time high.
Turning our attention to the sentiment indicators, I like the chances of a breakout rather than a breakdown. The sentiment composite is 18.55 thanks to a short-interest ratio of 6.7, a put-call ratio in the 87th percentile for the past year and analyst ratings where 24 out of 32 have the stock rated as a “hold” or lower.
AT&T stock hasn’t been performing great over the past few years, but it has been performing better fundamentally than what the sentiment would suggest. The three-year EPS growth rate is only 4%, but their annual ROE is 14.7% which isn’t hateful for such an established company. The annual pre-tax margin is a respectable 15.9%.
With such a bearish attitude toward the stock, I would love to tell you to bet on the breakout and be done with it, but seeing how the stock has performed in the past and given the overbought levels on the weekly charts, I have a better way to play it.
I would play a straddle on the stock using the August 35 strike calls and puts. With a straddle, you buy the puts and calls with the same strike price and the same expiration date. In order to give the move in the stock price time to play out, the August strike gives you 79 days. As of the close last night, the calls are priced at $0.98 and the puts are priced at $1.02, giving you a total cost of $2.oo per straddle. In order for this trade to be profitable, the stock will have to drop below $33 or jump above the $37 level. The worst possible case would be for the stock to become range bound between 34 and 36 and then close right at the $35 level come expiration day. In that case, both the puts and calls would be worthless.
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