S – Sprint Nextel Corp. – A sizeable long-term bullish transaction involving 30,000 option contracts on Sprint Nextel Corp. indicates one optimistic player expects shares in the telecommunications company to rebound ahead of February 2011 expiration. Since reporting third-quarter earnings the morning of October 27, 2010, Sprint’s shares have fallen as much as 20.4% from a high of $4.85 on October 26 to today’s lowest value of $3.86. It looks like the 20% correction in the price of the underlying stock has made conditions favorable enough for this contrarian strategist to establish a relatively cheap bullish stance on Sprint. The trader enacted a three-legged bullish position, selling a chunk of put options in order to partially finance the purchase of a debit call spread. Sprint’s shares have recovered off their intraday low of $3.86 and are currently down 2.2% to stance at $4.01 as of 2:55 pm. The investor sold 10,000 puts at the February 2011 $3.5 strike for a premium of $0.21 each, purchased 10,000 now in-the-money calls at the February 2011 $4.0 strike at a premium of $0.43 per contract, and sold 10,000 calls at the February 2011 $5.0 strike for a premium of $0.16 apiece. Net premium paid to initiate the three-legged spread amounts to $0.06 per contract. The investor responsible for the transaction makes money if Sprint’s shares rally 1.25% over the current price of $4.01 to surpass the effective breakeven point at $4.06 by expiration day in February. The bullish trader will walk away with maximum potential profits of $0.94 per contract if Sprint’s shares surge 24.7% and trade above $5.00 ahead of expiration next year. The short stance in Feb. 2011 $3.5 strike puts implies the investor sees shares trading above $3.50, but also indicates his willingness to have 1 million shares of the underlying put to him at that price if the puts should land in-the-money by expiration. Interestingly, Sprint is scheduled to report fourth-quarter earnings ahead of the opening bell on February 10, 2011, which is eight calendar days before the February contract call and put options expire.
Affiliation: Interactive Brokers
Andrew Wilkinson is the senior market analyst at Interactive Brokers Group, where he provides daily commentary and analysis on U.S. equity options trading throughout the trading day. Andrew provides webinars designed to explain option-related trading scenarios covering futures, fixed income, forex and equities.
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