As the $26.5 billion merger of the telecommunications giants awaits regulatory approval, options traders are overwhelmingly hedging their positions to protect against potential downside, says Dan Nathan, founder and principal of Risk Reversal Advisors.
Both stocks opened strongly on Monday before swinging lower on mixed messaging from federal regulators. They added to their declines in early Tuesday trading, with Sprint losing more than 2%.
"Put volume in T-Mobile was two times that of calls" following Monday's moves, Nathan said that evening on CNBC's "Options Action." "It's like the 'FCC won't let me be' trade."
One trader bought 1,000 of the June $77 puts when T-Mobile's stock was around $80 a share, a bet on the stock falling by at least 3% by the trade's expiration in June.
"So, if this [deal] doesn't go through, maybe this trader is looking for some protection to the downside because they are long the stock [and] hoping that the stock continues to rally," said Nathan, who is also co-founder and editor of RiskReversal.com and a regular trader on CNBC's "Fast Money."
He pointed to T-Mobile's 10-year chart, which showed a multiyear period of consolidation from 2011 to 2015 followed by a breakout, another consolidation period from 2017 to 2018, and then what appeared to be the beginnings of another breakout at the start of this year.
"Here's the thing: We know that T-Mobile has been a rumored acquirer, or maybe acquiree, over the last few years," Nathan said. "One way or another, T-Mobile is in play. They're either going to get this merger done with Sprint or maybe a big cable company buys them. I would not expect too much downside if this deal doesn't get done."
Guy Adami, a fellow "Fast Money" trader and director of advisor advocacy at Private Advisor Group, agreed with Nathan, noting that T-Mobile's stock has gained some 12% since Justice Department officials cast doubt on the Sprint deal's prospects in April.
"On the show that night, we said T-Mobile is too cheap; buy the stock," Adami said. "Here we are. John Legere, the CEO, is a stud. I think this play continues ... despite the move. TMUS to the upside."
T-Mobile's stock traded 1% lower in early Tuesday trading, but is still up nearly 22% year to date. Sprint shares are up nearly 23% for 2019.