The Southern Company (SO) is a utility stock with a twist. It operates as a public electric utility company with a little foray into telecommunications in the southeast. Generally it is one of the staple stocks I would hold in a portfolio and write covered calls against the common stock, as it is a nice yielder paying 4.80% and has a low beta of .13.
Taking a look at the chart, Southern has been in consolidation for weeks after a massive decline from $52.58 to $43.63. Currently, it is trading down on higher than normal volume as it breaks the consolidation to the downside. Technically speaking, this chart is not done correcting and should be good for a test of the 200 week moving average.
As this stock goes ex-dividend on Thursday, May 14, I would not want to be short the stock. If I was, I would then owe the dividend – not good. So this can be played three ways. First, you could purchase June 43 puts, which showed a volume of 5,752 vs. an OI of 484 which is 11x the volume. This piques my interest and indicates I am probably on the right side of the trade.
The second scenario is to wait for the test of the 200 week moving average and sell bull put spreads, since the volatility is juiced up and will continue to get higher as the stock falls. In this instance I would look to sell the August series, because the premium collected will be higher.
The third scenario would be to sell naked puts at the strike where you would not mind establishing a position. In this instance, I would like to be long the stock from a cost basis of around $37-$38.00; I would look to sell cash-backed puts or “short puts” in the August $40 range. By the time the stock is done dropping, I should be able to collect around $2 or better in premium. Therefore my cost basis on the stock would be $38. Once assigned, I would be able to start collecting the juicy dividends from a solid stock with a reasonable cost basis.
There are multiple ways to capitalize upon stocks that are in correction. I really like Southern Company, because it is both actionable right here right now and in the near future.
