In last week’s edition of Trading Tools, tween titan Aeropostale, Inc. (ARO) was analyzed after the Zacks Unusually High Option Volume screener revealed a strangle on the retailer. Employing the same filter for today’s column, a different security caught my eye: wireless bigwig Verizon Communications Inc. (VZ).

Before we begin, let’s explain the contrarian stance that makes Schaeffer’s so unique. When searching for a bullish pick, we like to see heavy skepticism toward an outperforming stock, as this leaves ample room for upgrades or other positive catalysts to fuel the stock higher. When searching for a bearish pick, on the other hand, contrarians are looking for significant bullish sentiment toward an underperforming stock, as we believe an excess of optimism is a sign that everyone has already bought into the stock and sideline money is virtually tapped out.

However, keep in mind that some optimism and pessimism is genuinely warranted and isn’t always a contrarian indicator – like an outperforming stock with many “buy” ratings or an underperforming stock with a plethora of “sell” ratings.

In the News

According to the Zacks screener, VZ saw a significant pop in put volume on Thursday. More specifically, the equity saw roughly 12,600 puts cross the tape, more than doubling its average daily volume of about 5,800 bearishly-oriented contracts.

Sparking the preference for puts may have been a double dose of negative headlines. Ahead of the bell Thursday, TiVo Inc. (TIVO) announced that it filed a patent lawsuit against Verizon and AT&T (T) regarding their use of digital video recorders (DVRs) and “time-warping” technology.

Later, the Federal Communications Commission (FCC) launched an investigation into the “innovation” of the wireless industry”. The news prompted widespread concerns regarding potential government restrictions in the future, such as capping rates that wireless companies charge one another to roam, and limiting consumers’ carrier choices for smartphones like Palm Inc.‘s (PALM) Pre and Apple Inc.‘s (AAPL) iPhone.

Digging deeper into the put activity; however, it appears that not all of the volume can be attributed to the bears.

Predicting a Price Swing

Most popular was VZ’s at-the-money Sep 31 put, which saw more than 3,000 contracts change hands. At 10:05 a.m. Eastern time, two blocks totaling 250 contracts traded at the ask price of $0.63, suggesting they were bought. At the same time, an equal amount of Sep 31 calls traded at the ask price of $0.66, implying they were also purchased. As such, it seems we’ve detected a long straddle on VZ – indicating that at least one investor is anticipating a monster move on the charts in the near term.

By adding the premium paid for the options, we find that the position was established for a net debit of $1.29 ($0.63 + $0.66), which also represents the most the strategist can possibly lose on the play. In order to avoid a loss, however, the investor needs the shares of VZ to power through one of two levels by expiration: $29.71 (strike – net debit) or $32.29 (strike + net debit).

On the Charts

Technically speaking, shares of VZ have been less than impressive lately, surrendering 8.4% since the start of 2009. In fact, compared to the broad market, the communications concern has underperformed the S&P 500 Index (SPX) by 11% during the past 40 trading sessions.

The equity is now attempting to maintain its newfound foothold atop its 10-month moving average, lingering in the $31 region. However, any rally attempts could be contained by the stock’s 20-month moving average, hovering just overhead. Both of these trendlines have acted as staunch long-term resistance, as VZ hasn’t closed a month north of this duo since late 2007.

In conclusion, VZ’s technical barriers don’t bode well for the aforementioned long straddler, as the goal of the strategy is for the shares to make a mammoth move in the near term. The prospects for a move lower appear much greater, though, considering any treks into the black could be capped by the stock’s 20-month trendline. While a pullback would still make money for the long straddle strategist, a significant rally would be even better, as potential profit is theoretically unlimited if the stock shoots higher.

Zacks Investment Research