Sprint (S): iPhone5 Will Just Put Off the Inevitable, Especially If T / T-Mob is Approved, VZ/Sprint is in the Offing

by Dan August 24, 2011 8:28 am • Commentary

Back in March shortly after AT&T announced their intention to purchase T-Mobile, I took a quick look at Sprint (read below) and weighed the potential for VZ to buy them if AT&T gets approval on their deal.   Following the initial dip on the T/T-Mob deal, Sprint rallied almost 25% through mid-June only to spend the rest of the summer imploding almost 45%.

6 Month Sprint chart from LiveVol Pro


Yesterday on “Quick Hits” on the site, I stated the following:  

Aug 23 2011, 12:17 PM

Dan: I just bought some Sprinit at 3.30, doing some work on the name and will look for the appropriate take out structure. If T gets approval to buy T-Mobile I would guess that VZ doesn’t have much to lose by making a move for Sprint

Aug 23 2011, 12:18 PM
Dan: IF T gets approval they will leap frog VZ to the number one spot in U.S. wireless market share.
Aug 23 2011, 3:26 PM
Dan: Sprint is up 11% now, as WSJ is reporting that the carrier will get the iPhone5 in Oct….
Aug 23 2011, 3:26 PM
Dan: I bought some Sprint this morning and have been doing a little work on the name and frankly I am surprised that this is news comes as surprise

Aug 23 2011, 3:27 PM

Dan: most of the research that i looked at this morning suggested this was likely to come in Q4

Aug 23 2011, 3:29 PM
Dan: I bought the stock because it is like an option and before I look to a take out structure I want to get have more conviction than I do at the moment….if I am going to place a trade that will most definitely take some trade management, like a diagonal calendar call spread, than I want to be sure…..with my long stock position I can just press eject!
MY CURRENT VIEW:  Sprint has lot going on, the stock has been battered because of poor subscriber performance which the company is hoping that the recently speculated iPhone5 launch in Q4 could help stem user defections….Sprint’s stock will remain volatile as the company scrambles to figure out how to continue to pay for their 4G build out and their prerogatives as it relates to their majority stake in Clearwire (read recent speculation about Sprint buyout of remaining CLWR equity here)…..The whole thing is a bit messy, and the truth is, if T does get approval to Buy T-Mob, Sprint without without a fully owned CLWR will not be able to compete with what will effectively be a duopoly between VZ and the new T.  If the feds let the T /Mob deal go through I am hard pressed to see how they couldn’t let at VZ/Sprint deal happen……Today I will look to replace the stock that I bought yesterday with a diagonal calendar call spread or possibly a straight vertical call spread.  2 Trades I am considering below.
TRADE 1: S ($3.59) Buy Jan12 $4  / Jan13 $7.5 call Spread for .24
-Buy Jan12 $4.5 call for .46
-Sell Jan13 $7.5 call at .24
Break-Even on Jan12 Expiration:
Profits: stock btwn 4.22 and 7.5
Losses: stock below 4 and the call you own in Jan12 expires worthless and you are faced with a decision to buy another call in a different expirey and keep the call spread on, buy the stock and turn into a buywrite or simply cover the Jan13 7.5 call that you are short which will be worthless than the .24 that you sold it for…..

TRADE RATIONALE:  I want to put on a position where I have little downside risk, if the economy weakens further and depending upon the outcome for T/T-Mob, Sprint could have some rough road ahead……Buying the stock for a potential 1.5 downside vs what I see is probably best case $3 upside is an ok risk reward….the structure I list above has really a max loss of the premium that I paid, potentially more if the stock is btwn $4.00 and $4.22 on Jan12 expiration, but not much…..In  a Fairly speculative situation like this, where the outcome is anything buy certain, I prefer long premium bets to define my risk.


Alternatively, for those that prefer less trade management, who just want to place their chips on the table and more simply define risk, consider:

TRADE 2: Buying S ($3.59) Feb12 4.5 / 6 Call Spread for .23

-Buy Feb12 4.5 call for .36

-Sell Feb12 6 Call at .13

Break-Even on Feb12 Expiration:

Profits: btwn 4.73 and 6 make up to 1.27, above 6 make full 1.27 or 5x your money.

Losses: btwn 4.50 and 4.73 lose up to .23 and worst case stock below 4.50 lose all .23 premium that you paid.




Original Post March 24th: Sprint Cheaper Than 99% of S&P 500 Signaling Merger-Bloomberg      

Sprint  $4.50

Top Bloomberg story this morning getting some play (below) that in the wake of AT&T’s $39bln bid for T-Mobile, and Sprint’s ~10% sell off that the market is valuing Sprint’s assets at ~.92 on the dollar, I can’t speak to that as I am not a financial analyst, but it does make sense that if the combination of T and T-mobile leapfrogs VZ to become the largest U.S. wireless carrier that VZ will be left with no choice other than to further consolidate the market.


Sprint’s 11 percent slide to $4.49 since the T-Mobile USA deal was announced March 20 has left its stock trading below the company’s $4.87 a share in assets minus liabilities. That means investors can now buy Sprint for 92 cents on the dollar, cheaper than 99 percent of companies in the Standard & Poor’s 500 Index excluding financials, according to data compiled by Bloomberg. Sprint’s licenses from the U.S. Federal Communications Commission, which give it the right to operate its network in specific regions, alone are worth $19.9 billion, 46 percent more than its market capitalization of $13.6 billion, the data show.

As a rule it probably doesn’t make a ton of sense to load up your portfolio with every rumored take-over candidate, either long the equity or long outright calls, because unless you know something you shouldn’t your success rate won’t be that high.  And if you do know something you shouldn’t the SEC’s first stop after announced deals is too look for strange options activity prior to the deal announcement. PSA: don’t trade on inside info, exhibits A-Z: the 26 perp walks since Oct 2010.  moving on…….

To put on a take out trade structure in Sprint you have to agree on a few things first:

1. There is a strong likelihood that the feds approve the T-Mobile deal, this could take up to a year, maybe longer,

2.If deal looks like it is going to get approved, will VZ will have no other choice but to grab U.S. market share?  The answer will clearly be yes, and S will have very few alternatives as it will become difficult to compete nationally with 2 even stronger players.

3.have a level of confidence that Sprint won’t make its own dumb acquisition to better compete with VZ, T and T-mobile that would cause the stock to remain depressed…..They were rumored to be looking at T-mobile and they dont even use the same technology, so they maybe looking at other more regional or nichey players like US cellular or Leap.

I am sure I missing a few other things to contemplate, but those are the ones that I am focused on as I evaluate the merits on putting on the trade…..

DEAL PRICE GUESS: let’s assume $5.50 to 6.00 as that would be a 3 yr high and a slightly premium to what T proposed for T-Mobile. (Please sign in or sign up for Free Trial to read trade structures)


1. You could always just buy the stock here as your downside probably not more than 1.50 to about $3.00 which was essentially the low in 2009, but this is a website about options….so let’s disqualify that silly suggestion.

2. Classic take out structure- Call Spread Risk Reversal– you will want to give yourself some time possibly look as far out as Jan12, the deal won’t likely get approval by then but the battle lines will be drawn and VZ will probably have to move sooner than later……

TRADE: Sell the Jan12 4 Put to buy the Jan12 4.50 call and Sell the Jan13 7.50 call

-Sell 1 Jan12 4 Put at .43

-Buy 1 Jan12 4.5 call for .72

-Sell 1 Jan13 7.5 call at .34

Structure results in a .05 credit, You are taking in .77 for selling the Jan12 4 put and the Jan13 7.5 call, and paying out .72 for the Jan12 4.50 call


On Jan12 expiration:

-if stock above 4.00 but below 4.50 the Jan12 4 put and the Jan12 4.5 call expire worthless and you are short the Jan13 7.50 call naked.  At this point you will have to make a decision whether or not you feel the company will be taken out, if you still feel strong liklihood than you either want to buy a call or buy the stock and turn it into an overwrite.

-if stock is above 4.50 but below 7.50 then the Jan12 4 put will expire worthless and you can either exercise the Jan12 4.50 call or sell it and take the profit and cover the Jan13 call if you no longer think the company gets taken out. But if you still think it gets taken out proceed as suggested above.  If the stock is not anywhere near 7.50 at this point the Jan13 call will have likely decayed a bit and not appreciated.

-BEST CASE: lets say u get a $6.00 deal in Sept, the Jan12 4 put will likely go to zero and the Jan12 4.5 call will trade like stock (with little extrinsic value), but the Jan13 7.5 call is likely to lose most of its time value (especially if it is a mostly cash deal like the T/T-mobile deal) as the market will assume that the deal will be done and price those longer dated options differently.


-Buy the stock at 4.50 and sell the Jan13 7.50 call at .33


-On Jan13 expiration if stock below 4.17 you lose money

-btwn 4.17 and 7.50 can make up to 3.33 [/private]