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Is the telecom rally losing its legs?

David Russell (david.russell@optionmonster.com)

Big telecoms are at long-term highs, and traders want to protect their gains.

optionMONSTER's Depth Charge monitoring program detected bearish put spreads in Verizon Communications and AT&T. They were very similar in structure and occurred around the same time, suggesting that they were the work of a single large investor.

The first transaction appeared in VZ, with 5,000 December 45 puts bought for $0.79 and an equal number of December 41 puts sold for $0.21. The investor paid $0.58 and will earn a profit of 590 percent if the stock closes at or below $41 on expiration. VZ is currently down 0.54 percent to $46.32 in morning trading.

On minute later, the Depth Charge showed the purchase of 5,000 December 37 puts in T for $0.83 and the sale of an equal number of December 33 puts for $0.17. This time it cost $0.66 and will generate profit of 506 percent on a drop to $33. T fell 0.61 percent to $37.43.

Investors often use put vertical spreads rather than selling stocks when they are sitting on profits. The strategy allows them to leverage a drop, offsetting their losses if the shares decline. (See our Education section for other hedging strategies.

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