By Jeff Kearns and Cecile Vannucci - Oct 4, 2011 4:38 PM GMT+0700
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Verizon’s implied volatility, the key gauge of options prices, for contracts expiring in three months surged 73 percent since its July 1 low to 26.37 yesterday. Photographer: Denis Doyle/Bloomberg
Options traders are the most bearish in six years on Verizon Communications Inc. (VZ), convinced it will decline after the largest U.S. wireless operator posted the industry’s biggest stock-market rally.
Three-month options to protect against a 10 percent drop in the shares cost 44 percent more than those wagering on an advance, according to data compiled by Bloomberg. The gap reached 47 percent on Sept. 28, the widest since July 2005, when it was 49 percent, data compiled by Bloomberg show. Three months after that peak, Verizon tumbled 15 percent to a three-year low.
Investors are betting the economic slowdown that has sent the Standard & Poor’s 500 Telecommunication Services Index down 6.9 percent this year will pull down New York-based Verizon. While the stock has the biggest increase among phone companies at a time when the S&P 500 is within 1 percent of a bear market, Verizon lost 45 percent during the financial crisis of 2008, data compiled by Bloomberg show.
“It’s part of the very negative tone to the market that there’s a lot of puts outstanding,” Brian Barish, who oversees about $7.5 billion as president of Cambiar Investors LLC in Denver. Verizon has “been a safe haven and held up very well but the market has been very destructive. At some point in bear markets, they tend to get to everything and this is one of those last haven stocks that’s yet to fall.”
Implied Volatility
Verizon’s implied volatility, the key gauge of options prices, for contracts expiring in three months surged 73 percent since its July 1 low to 26.37 yesterday. Historical volatility for the past three months jumped to 24.13 yesterday, the highest level since June 2009.
The VIX, as the Chicago Board Options Exchange Volatility Index is known, jumped 160 percent in the third quarter, its biggest increase on record. The volatility gauge is trading above its 21-year historical average of 20.46 and rose 5.8 percent to 45.45 yesterday. In Europe, the VStoxx Index (V2X), which measures the cost of protecting against losses in the Euro Stoxx 50 Index, gained 5 percent to 51.09 at 11:36 a.m. in Frankfurt.
Verizon shares fell 1.3 percent to $36.34 yesterday. They’re up 1.6 percent in 2011, compared with a decline of 13 percent for the S&P 500 Index.
The price of puts to sell Verizon should the company fall 10 percent versus calls to buy is the second-highest among eight S&P 500 telecom companies, Bloomberg data show. Larger rival AT&T Inc. (T) has the highest level of the price relationship known as skew. Sprint Nextel Corp. (S) had the lowest, with puts priced 4.6 percent higher.
Higher Yields
Robert Varettoni, a spokesman for Verizon, declined to comment on the stock price or options trading.
Verizon shares have fallen less than other companies this year in part because investors seeking higher yields are buying the stock for its annual dividend payout, according to Craig Moffett, an analyst at Sanford C. Bernstein & Co. in New York. The stock currently yields 5.4 percent, Bloomberg data show. Those traders also may be paying more for protection because they want to keep owning the shares, he said.
“It could be what we’re seeing is hedging strategies from yield investors,” Moffett said in a telephone interview yesterday. “It’s trading at a huge premium to AT&T.”
Verizon has a price-to-earnings ratio of 16.7, 27 percent higher than the valuation for Dallas-based AT&T, the largest U.S. wireline telecom-services company, and 36 percent above the S&P 500 Index.
AT&T Takeover
The New York-based company may also be attractive because it’s not going through a big change similar to AT&T’s $39 billion proposed takeover of T-Mobile USA Inc., according to John Butler, a Bloomberg Industries analyst. AT&T has clashed with the Justice Department and rivals like Sprint Nextel as it seeks to complete the acquisition.
“The telcos are attractive in a choppy macroeconomic environment because they offer a generous yield relative to other S&P stocks,” Butler said in a telephone interview from Princeton, New Jersey, yesterday. “People look at Verizon and they’re like, ‘You know what? If I had to choose between owning Verizon and AT&T, I’m going to choose Verizon because they don’t have the distraction of that merger going on right now.’”
January $30 puts, with their strike price 17 percent below yesterday’s closing level, had the biggest ownership among all Verizon options. January $31 puts had the biggest increase in open interest over the past week, adding 6,764 contracts to 19,676. The shares haven’t closed below $31 for more than a year.
“Since the stock has been going up of late, that would let you know that in a certain sense the options market reflects that the upside has been realized,” Ophir Gottlieb, managing director of client services at San Francisco-based Livevol Inc., a provider of options-market analytics, said in a telephone interview yesterday. “It’s the downside risk that’s the potential.”
To contact the reporters on this story: Jeff Kearns in New York at jkearns3@bloomberg.net; Cecile Vannucci in Amsterdam at cvannucci1@bloomberg.net
To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net
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