Note: This post was written by Brian Stutland, President of Stutland Equities and a contributor to CNBC's "Options Action."
Yesterday we saw some unusual options activity in Sprint Nextel.
One trader bought 107,000 Jan. 2014 7-strike calls for $0.63, paying a total of $6.7 million in premium. These calls were bought as Sprint's stockfell over 5% yesterday on news that Deutsche Telekom was close to a deal with MetroPCS that will bolster the German company's T-Mobile USA division. Indeed, the deal was made official this morning.
The calls purchased require the stock to be above $7.63 to break even, which is over 50% higher than yesterday's close. The trader did give himself some time to be right, as expiration for these options is 471 days away. Recently Sprint has been a turnaround story: brand recognition has improved since it began offering customers the iPhone and Galaxy S, and the company has entered the LTE tablet market, boosting revenue and allowing the company to slowly reduce debt. FBR Capital raised their price target for the stock to $7 on Sept. 27th, saying that the Sprint turnaround continues to gain momentum.
Buying far-out-of-the-money calls is a way to play this turnaround story without a large outlay of capital. However, buying calls that require such a big move translates into substantial risk that the options could expire worthless and the entire amount of premium paid could be lost.
I consider these types of trades to be speculative, and take care to size them appropriately for my portfolio. In other words, hang up.
Brian Stutland is the President of Stutland Equities and a contributor to CNBC's "Options Action."
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