Despite the common saying, no news may not always be good news.
Take the wireless industry, which saw some major rallies last year as investors hoped for consolidation between smaller players. Sprint (NYSE: S) led the charge, almost quadrupling from long-term lows. But the deals haven’t materialized yet, and sellers have been going to work.
Bears crowded in after the May 3 quarterly report. Earnings, revenue, cash flow, subscriber growth… yawn… those were mere distractions in the eyes of a market hungry for news of a potential merger. Some experts even fretted that the company’s financial performance had already peaked, and its allure as a would-be takeover target was fading.1 S quickly plunged from over $9 to under $8.
The stock held its ground for about two weeks, but yesterday options traders seemed to be looking for another leg lower. A little more than an hour into the session, they sold 7,500 May 8 puts for $0.44 and bought a matching number of 26-May 7.50 puts for $0.20. Let’s break it down:
- Puts fix the price where a security can be sold. They tend to appreciate when shares decline, but can expire worthless if the stock stays where it is or rises.
- The investor already owned the May 8s and apparently made money from the stock falling on Wednesday.
- They rolled from the May 8s into the 26-May 7.50s, in the process recovering $0.24 of their capital. (Remember each contract controls 100 shares, so that’s really $180,000, minus any commissions.)
- They now have an additional week to profit from further downside. Their new contracts will break even at $7.50, with $7,500 of profit every penny the stock goes below that level.
Source: OptionsHouse by E*TRADE
S rose 7.49 percent to $7.89 yesterday. M&A hopes once again were the catalyst — this time it followed a Bloomberg report that antitrust regulators may prove more amenable to a merger with T-Mobile US (NASDAQ: TMUS).2 Such a marriage has been bandied about for years. Barclays also said earlier this week that conversations had resumed between the two carriers.3
Another way to look at the options activity: The investor may actually own S shares, hoping for a rally if a potential deal takes place. Owning the puts lets them hedge that bet and protect against losses should nothing happen. They might also be dismayed after cable operators Comcast (NASDAQ: CMCSA) and Chart Communications (NASDAQ: CHTR) teamed up to provide wireless services, turning potential buyers into competitors.4
Some chart watchers may see ominous signals in the price action, because S has slipped back below its 200-day moving average for the first time since in almost a year. Is the trend reversing?
Bottom line: S has run hard on takeover hopes, but now traders seem to be bracing for a drop.
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1. Reuters: Sprint mum on M&A plans as quarterly loss narrows; shares down. 5/3/17. Bank of America Merrill Lynch: F4Q16 First Look: Results meet lowered expectations in tough quarter. 5/3/17.
2. Bloomberg: Sprint's Pursuit of T-Mobile Gets New Hope in Trump's Washington. 5/17/17.
3. Benzinga: Signs A Sprint, T-Mobile Tie-Up Is Gaining Momentum. 5/15/17.
4. Wall Street Journal: Comcast, Charter Strike Wireless Partnership. 5/8/17.