July 18th, 2023

Telecom Giants Plunge Amidst Controversy

Stay away from telecom for the near future. As option credit sellers, the likes of AT&T (T) and Verizon (VZ) don’t normally come across our scans anyway, but they are in a mess right now with no clear ending. Maybe that’s why AT&T tanked over 10% in three days and is near a 30-year low.

What did they do to get into this mess? I’ll give you a hint – it’s not 5G-related, so put your conspiracy caps down. And who’s the one company that is threatening to disrupt the industry and could strike while the iron is hot?

As much as I try to write about where the market is going and what sectors and stocks are leading the way, it’s equally important to mention the sectors to stay away from and today that’s the telecom industry.

Wireless subscribers are getting to their saturation point, so the only thing left for the telecom industry is to increase prices, guard against competition, and above all else, don’t screw up.

Amazon (AMZN) has been threatening to enter and disrupt the telecom giants, but that hasn’t happened yet.

Instead, the companies allegedly got in their own way as a damning report in the Wall Street Journal mentioned that telecom giants like AT&T and Verizon used lead-covered cables and they are contaminating parts of the country.
AT&T shares have been sliding.

As have shares of Verizon.

Now, unlike other news events where you can trade based on an over-hyped report that falls out of the news cycle, this time it’s different. No one knows the financial risk, if any, for each of the companies in play. Regulators weren’t flagging these cables as a risk before, but if this turns into a big deal, there are a lot of legacy assets out there to change. The cost could be astronomical. That’s not including any potential lawsuits.

It’s important to note that these companies are in the SPDR Communication Services ETF, XLC, but that ETF has largely been unscathed since it also contains companies like Meta (META), Alphabet (GOOG/L), and Netflix (NFLX).

This might all blow over. Maybe another political scandal or major news event will help us forget about lead wires hanging overhead, but the market doesn’t like uncertainty, and this is not likely to be resolved for some time.

There are better sectors to play in any way. Information Technology leads the 1-day and 5-day leaderboard, so that may be due for a pullback. There could still be some juice left to squeeze.

As mentioned, the Communication Services sector is being dragged down, but Financials are rising up the 1-day leader board and could help elevate the 5-day performance. The gains are mostly due to earnings in the sector. Could that sector enjoy a post-earnings drift higher for a few more days?

I have a debit trade idea for everyone today.  Let’s look at Etsy (ETSY).  The stock hasn’t enjoyed the rally as much as the rest of the market, but it looks to be in a consolidation pattern as it’s coming into a historically strong part of its seasonality.

After analyzing the last 8 years of data, we know that the stock performs well over the next 7-week period. The stock has risen in 6 of the last 8 years giving it a historical accuracy of 75%. The average move during the 7-week period is 7.36%.

To be clear, part of those gains are tied to the stock’s performance around earnings, which are estimated to be released this year on 7/26.

Holding stocks through earnings is not for everyone and I understand that, but I’m looking for a break higher, out of the consolidation area and a positive earnings report could get us there. You could certainly add this trade to your watchlist and see if it makes sense to do it after earnings are announced.

The trade though is to buy a 15-SEPT $95 call while simultaneously selling a 15-SEPT 110 call. At the time of writing, the price is going for a 4.75 debit.

If ETSY rises by 7% by 8/18, the call spread could be sold for an estimated $6.45, creating roughly $169 in potential profits per spread. That’s roughly a 35% return.

Since this is a debit spread, the stock needs to move higher and quickly. If the stock stays at the same price, this option position will lose approximately $1.47 of potential profits each day, and that will accelerate the closer we get to the expiration date.

If you have any questions, comments, or anything we can help with, reach us at any time.
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Jeff Wood

Editor, Filthy Rich Dirt Poor
Coach, Options Testing Lab


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