My Phone’s Bigger: Pairs or Basket Trade

• Posted by Greg Harmon
• on August 2nd, 2011

Seems not that long ago that everyone wanted to own the small cellular carriers like Sprint (ticker: $S), MetroPCS (ticker: $PCS) and United States Cellular (ticker: $USM) or even internet phone carriers like Vonage (ticker: $VG). Now given the charts of those stocks traders would rather get a sharp stick in the eye than own them. These charts are so ugly that it may be hard find shares of some of them to short! If you can great. But also consider that since they have fallen so fast that a snap back may occur.

In that event, shorting them against a stock in the sector that looks more positive can give some comfort and Verizon (ticker: $VZ) is a good candidate. From the chart below it has been in a consolidating range between 34.50 and 38 since January, other than a brief spike lower in March. It is now testing the resistance of the inner level at 36.35. A move higher through that level would suggest a test of the top of the range at 38 is to come. The rising Relative Strength Index (RSI) and improving Moving Average Convergence Divergence (MACD) indicator support the price moving higher.

Verizon, $VZ

My preference would be to short an equal weighted basket against $VZ as they are all in various stages of breakdown. My charting software limits me to one to one comparisons though so I will illustrate each pair below. You can either pick your favorite or plow through the math for the basket below which will cost a net of $46.

trade Idea: Long 200 $VZ vs Short 111 $PCS, 468 $VG, 418 $S and 41 $USM

You see from the pairs below though that $VZ is strong against each name, breaking resistance, which can be used as a stop. If you cannot take the basket then the trade against $PCS looks the best to me, and can be done against 50 shares of $VZ. Use the break over 2.22 to confirm entry with a target of 2.35 followed by 2.40 and 2.50. A stop can then be placed at 2.17 risking $38 to make $102 at a ratio of 2.35 and $210 at a ratio of 2.50. That is a reward to risk ratio of 2.68:1 and 5.52:1 respectively.

Verizon, $VZ vs. Sprint, $SxxxxxxxxxxxxxxxxxxxxxxxxxxVerizon, $VZ vs. Vonage, $VG

Verizon, $VZ vs. MetroPCS, $PCSxxxxxxxxxxxxxxxxxxxxxxVerizon, $VZ vs. US Cellular, $USM

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