IB Options Brief: Sprint Nextel Corp. (S) & Semiconductor HOLDRs (SMH)
Bulls Prep For Continued Run-Up In Sprint
S ñ Sprint Nextel Corp.
Shares in the third-largest U.S. mobile provider hit a new 2-year high today, rising as much as 5.9% earlier in the session to $5.90. The communications companyís share price took a big hit after AT&T and T-Mobile announced plans to merge back in March, but the stock has sky-rocketed in the two months since then, gaining 41.5% off its post-deal announcement low of $4.17.
Perhaps shares were helped higher on news Leap Wireless International joined ìteam Sprintî in opposing the $39 billion acquisition of T-Mobile by AT&T. Shares in Sprint Nextel Corp. may also be higher ahead of the Thursday release of Googleís mobile-payment service, which will operate on Sprintís phones. Investors positioning for the uptrend to continue over the long term initiated bullish plays in the November contract.
It looks like traders are employing ratio call spreads, buying roughly 2,500 calls at the November $7.0 strike for an average premium of $0.31 each, and selling around 5,000 calls up at the higher November $8.0 strike at an average premium of $0.14 apiece. Net premium required on average to establish the trade amounts to just $0.03 per contract.
Ratio call spreaders stand prepared to make money in the event that Sprintís shares surge 19.2% over todayís high of $5.90 to surpass the average breakeven price of $7.03 by expiration day in November. Maximum potential profits of $0.97 per contract are available on the transaction should the price of the underlying stock jump 35.6% to settle at $8.00 at expiration. Sprint Nextel Corp. shares last traded above $7.03 back in September 2008.
The sale of twice as many of the higher-strike calls substantially lowered the price at which call spreaders break even, but also ups the amount of risk undertaken on the position. The uncovered short calls may result in losses in the event that shares spike above the upper breakeven price of $8.97 at expiration in November. Options implied volatility on the wireless provider is up 6.2% to arrive at 44.67% as of 1:00pm in New York.
SMH ñ Semiconductor HOLDRs
A sizable bearish put spread initiated on the Semiconductor HOLDRs Trust ETF this morning suggests one options strategist expects the price of the underlying fund to continue to decline ahead of June expiration. Shares in the SMH, an exchange-traded fund that tracks the performance of 18 semiconductor companies, are currently down 0.30% to stand at $35.10 as of 11:15am in New York.
The largest holdings in the SMH represent a combined weight of nearly 59.0% and include Texas Instruments (TXN), Intel Corp. (INTC), Applied Materials (AMAT) and Altera Corp. (ALTR). The bearish play on the SMH may hint at expectations for bearish movement in the price of these chip makersí shares, as well.
The options player responsible for the spread appears to have purchased 7,500 puts at the June $34 strike for a premium of $0.42 each, and sold the same number of puts at the lower June $32 strike at a premium of $0.11 apiece. Net premium paid to initiate the spread amounts to $0.31 per contract.
The trader makes money if shares in the SMH fall another 4.0% from the current price of $35.10 to breach the effective breakeven price of $33.69 by expiration day next month. Maximum potential profits of $1.69 per contract are available to the investor in the event that SMH shares drop 8.8% to trade below $32.00 at expiration. Shares in the fund last traded below $32.00 in December 2010.
Note: The material presented in this commentary is provided forinformational purposes only and is based upon information that isconsidered to be reliable. However, neither Interactive Brokers LLC norits affiliates warrant its completeness, accuracy or adequacy and itshould not be relied upon as such. Neither IB nor its affiliates areresponsible for any errors or omissions or for results obtained from theuse of this information. Past performance is not necessarily indicativeof future results.
This material is not intended as an offer or solicitation for thepurchase or sale of any security or other financial instrument.Securities or other financial instruments mentioned in this material arenot suitable for all investors. Any opinions expressed herein are givenin good faith, are subject to change without notice, and are onlycorrect as of the stated date of their issue. The information containedherein does not constitute advice on the tax consequences of making anyparticular investment decision. This material does not take into accountyour particular investment objectives, financial situations or needsand is not intended as a recommendation to you of any particularsecurities, financial instruments or strategies. Before investing, youshould consider whether it is suitable for your particular circumstancesand, as necessary, seek professional advice.
View Andrew Wilkinson's post archive >