The Telecom sector is the smallest component of the S&P 500 Index, comprising only 2% of its cap-weighted (market value) performance. For that reason, the relatively few stocks in that sector are less affected by ETFs and trading algorithms that seek to mimic the daily performance of the index by focusing on its largest components.

However, CenturyLink has been the exception to that rule over the past two months, falling in tandem with the overall stock market. That has increased the implied volatility of its options, allowing us to write a put option at a strike price more than 5% below its current share price for a premium yield of better than 6% over the next four months. That works out to an annualized return of 18%.

CenturyLink’s recent financial performance has been bogged down by the acquisition of Level 3 Communication last year. One of the costs associated with that transaction was realized during the most recent quarter when the company allowed some unprofitable contracts to expire. That depressed top-line revenue, but will be additive to bottom-line earnings going forward.

Despite its outsized yield of 12%, the company is guiding for higher FCF (free cash flow) in 2019 so a reduction in the dividend seems unlikely. In fact, the company’s FCF projection of $4.0 – 4.2 billion for next year is nearly twice the $2.3 billion cost of paying the annual dividend.

For that reason, I believe CTL’s recent decline is primarily the result of DCF (discounted cash flow) pricing models that have extrapolated the most recent quarter’s revenue decline into the future without realizing that the lost revenue was unprofitable to begin with. If I am right about that then CTL should bottom out near $16 and start heading back up to the upper teens during the first quarter of 2019.

Regardless of how many contracts you sell, it’s absolutely critical that you follow the instructions below, particularly when it comes to setting the limit order.

How to Make the Trade:

• Trade: Sell to open the April 18, 2019, $16 put option on CenturyLink (NYSE: CTL).
• Symbol: CTL190418P00016000
• Limit Order Price: a credit of $1.00 or more.

Tell your broker: “I want to sell a put on CenturyLink stock. Specifically, I want to ‘sell to open’ one $16 Put that expires on April 18 for a credit of $1.00 per share or more.”

Note: Sell one put for every 100 shares of CenturyLink stock you would be pleased to buy at $16 per share. Investors should set aside $1,600 per contract sold to buy the stock in case the option expires in the money.

Further Instructions Regarding the Trade:

• • If the option price changes, you can adjust our recommended limit based on the midpoint of the bid/ask spread, which you should be able to see when entering the trade. Just make sure the potential credit is at least equal to the Limit Order Price specified above.
  • Place your limit order on a “good ’til canceled” (GTC) basis and be patient.