Feel the Itch? Verizon May Have Caught Telco Fleas

Remember how nice and sweet the market used to be? Buy a stock, watch it ramp up, get paid, be happy. It was like a new romance -- without the getting-paid part, of course -- when you spend hours cuddling on the couch watching TV and nothing seems like it can bother you.

Well, if telecom stocks were lovers, they'd be sleeping in the garage about now, with little chance of earning their way back into the comforts of home. This week, the options market showed that telecom stocks were still decisively in the doghouse, no matter how many pundits said we were turning yet another corner.

As a brief aside, in a Manhattan restaurant Wednesday, I spotted the CNBC screen, on which someone was asking if a turnaround was near. I turned to my buddy, a bond trader, and said, "Whaddya think?"

"We're going straight down," was his nonchalant response between bites of angel hair pasta with shrimp and tomato sauce.

This time around, activity is signaling some new weakness in Verizon (VZ Quote). (If anyone there is reading this, please don't cut off my DSL service until next week. Thanks.)

Verizon's stock is interesting because while it hasn't prospered, it has at least kept pace with the S&P 500 and has avoided the meat grinder that's eaten up most other telecom plays -- so far. (I guess I might as well switch to an AT&T (T Quote) cell phone now.)

This week, Verizon had to pony up some extra basis points to get investors to take on a $2 billion bond offering. Leading into the offering, Verizon's put prices were skewed higher than its call prices, something that can often tip off investors that the market's starting to sour on a stock.

Learning Some Lessons

Hmmm. Are investors wary of taking on telecom debt before the wheels come off? Can we be getting smarter? The stock had actually picked up some steam in bouncing back from weakness before it got whacked Wednesday. It slipped $2.59, or about 6%, to close at $39.81. (Remembering when this stock was at $60 is like recalling when your husband -- the one in the doghouse -- wore size 32 pants.)

Whether the negative crescendo continues the rest of the week is another question. The strong put activity in Verizon's July options means it just may.

With just two days until the June options expiration, few were in a hurry to jump on the June contracts, but enough investors may have been rolling them into similar spots in the July cycle.

The out-of-the-money July 35 puts traded more than 1,000 contracts, and there had already been enough action to push open interest at that strike to more than 8,000 contracts.

The price of those puts also started to show an aversion to sticker shock. You might have paid 50 cents early in the day, but by the close, it would have cost you 85 cents to snare one of these babies.

That's still relatively cheap, considering the risk you'd take on shorting the stock outright. And if you consider how quickly out-of-the-money puts can land in the money in this market, the 85 cents could seem like a steal. Then again, that's a 54% jump in one day. Is it enough to keep people from playing the negative sentiment without something terrible happening?

That's the tough part of playing puts in this market. The disasters come quickly, and before you can jump in, the opportunity seems to have passed. Then again, stupid is as stupid does, so if you're thinking Verizon's or the sector's (or the market's, for that matter) woes have passed, maybe you need to check what's in your box of chocolates.

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Hey, the Chicago Board Options Exchange Volatility Index is knocking on the 30 level's front door, up from the low 20s a few weeks ago. That's when I suggested that investors consider buying options, as opposed to the traditional summer habit of selling them, because prices were likely to go up.

Hope it made you a little money -- and maybe got your portfolio closer to the doghouse exit.