Anatomy of a Trade – $TMUS Alternatives

by CC February 17, 2016 11:28 am • Commentary• Trade Ideas

Note: TMUS stock moved lower while I was writing this due to a large options trade that forced market makes to sell deltas in the stock to hedge. We’ll detail this trade later but it appears to be a large investor rolling a protective collar against long stock from February to May.


Yesterday, we highlighted two trades that could act as a stock alternative in T-Mobile (TMUS) into its earnings report. Both were positioning for potential upside, but particularly after earnings and any talk of a takeover over the next few months. So let’s check in on these two trade ideas and see how they performed with the move higher in the stock and talk about how to manage them from here. Here was the first trade idea and rationale:  

In lieu of 100 shares of TMUS buy the May 30/40 risk reversal

Buy the TMUS ($35.30) May 30/40 Risk Reversal for .30
  • Sell 1 May 30 put at 1.00
  • Buy 1 May 40 call for 1.30

Rationale – This trade has the risk profile of long stock, but only below $30 and above $40 on May expiration. Therefore it defines an area of normal stock movement in a 10 dollar wide range where there’s essentially no harm, no foul. The goal here is to participate in a sharp move higher on takeover speculation, without the risk of the stock pulling back slightly. A steep decline in shares below $30 and you are put the stock, so you would need to be willing to own the stock at that level. The most likely odds are that neither the call or the put come into play and 30c was spent for a few months of takeover opportunity.

The May 30/40 risk reversal cost .30 at the time of our post yesterday when the stock was 35.30. Today, with the stock 36.50 this trade is worth about .65. So it’s produced about a .35 gain with the stock up about a dollar from entry. The position is about 50 deltas here so mark to market will have gains and losses of about .50 per dollar move from here. But if the stock goes sideways from here the deltas will continue to approach zero over time into May expiration.

As far as trade management it probably makes sense to close the short put at some point, but there’s no rush unless the stock starts to approach that strike. Ideally that put could be covered for .25 or less with a stronger move higher in the stock. If that move higher doesn’t come, or if you wanted to take the margin cost of being short a put off there are a couple of things that can be done. To simply reduce the cost of the position of being short the put you can turn it into a short put spread by buying a lower strike put (lower than $30) for about 10c. That reduces the risk below to whatever the width of that put spread is (e.g. if you bought the May 27 puts for .10 you’d be short the May 30/27 put spread at .90 with risk of only 2.10). That’s a good move for those not wanting to have money tied up in the position of being short a put with risk to zero and that can be done on any move higher in the stock.

The other way to reduce the put risk is to simply close the short May 30 put and then sell an upside call above the 40 strike. For instance with the stock a little higher (like it was this morning), the May 30 put could be bought to close and the May 45 call sold to open for even. This would leave you with a 40/45 call spread for next to nothing. That obviously takes away any lotto ticket chances for a takeover as the most that call spread can be worth on a move higher is $5, but it’s a position with very little risk. So that’s something to keep an eye on if the stock goes higher from here.

Now to the second trade idea. This one looked to finance May calls by selling the weekly calls of the same strike.

in lieu of 100 shares of TMUS buy the Feb/May 37 call calendar:

Buy the TMUS ($35.30) Feb/May 37 call calendar for 1.80

Rationale – This trade fades the near term upside potential on the event itself to position for further upside in the months after. Ideally the stock would go slightly higher in the event, leaving a well financed long May 37 call and a worthless short of a Feb 37 call. Even if the stock went nowhere or slightly lower in the near term you would still be positioned for possible upside through May. The most that can be lost on this trade is what is paid for it, so it’s risk profile is better than that of long stock if the stock gets hit hard in the next few months. There is slight risk to the upside on the event itself as a large gap to the upside above the $37 strike could actually turn what was a bullish trade into a bearish one, but that level is significantly higher where it would be a near term loser and is unlikely.

With the stock 36.50 this calendar is worth about 2.10. That’s a decent profit mark to market but the real intention of this trade is to stay long May calls for a possibly strong move higher in the months to come. Therefore the best thing that can happen is for the stock to close at 37 (or thereabout) on this Friday’s expiration. In that scenario the Feb short call can be closed for next to nothing (or let expire worthless if the stock is below $37) and then the May calls can either be kept as is (owning them for much cheaper than they are trading) or it too can be turned into a very cheap call spread with the sale of an upside call. (e.g. selling the May 45 call).

So basically both trades are working well with the stock slightly higher. But the real intention behind the trades was as a stock alternative for after earnings with a much better risk profile than simply being long the stock into an uncertain event.