MorningWord 1/11/17: TMUS: Upward Mobility

by Dan January 11, 2017 9:36 am • FREE ACCESS

Shares of T-Mobile (TMUS) had a heck of a day yesterday, opening on its low, and closing on its high, up 3.4% after a 6% intra-day reversal:

TMUS 2 day chart from Bloomberg

The stock caught a bid on this headline:


Per Bloomberg:

As business lines begin to blur with phone providers like AT&T Inc. offering live TV over broadband, Malone said a cable industry response could be possible. AT&T, the owner of DirecTV, recently agreed to buy Time Warner Inc. for $85.4 billion, a deal that will require regulatory approval from the new administration.

“Maybe the three major cable companies get together and buy T-Mobile,” Malone said. “One could contemplate in a Trump administration Comcast and Charter could merge,” he said, referring to the No. 1 and No. 2 cable TV providers.

This makes perfect sense to me. Sprint’s (S) heavy debtload, $36.5 billion relative to its $35 billion market cap and $5.6 billion in cash make it tough to swallow for a cable company, but that is Softbank’s problem, who owns 83% of S.  TMUS’s leverage situation is fairly similar with $30 billion in debt, $5.3 billion in cash and a $48 billion market cap, with Deutsche Telecom owning 64%. Both companies have about $10 billion in ebitda on $33 and 36 billion in sales respectively. The consortium concept though for a wireless asset by cable companies that are already saddled with tons of debt might make sense. I’ll leave that for the bankers, but from where I sit, if the AT&T (T) / Time Warner (TWX) starts to see some light on the regulatory front (no guarantee), I suspect we will quickly see other deals that vertically integrate these sorts of assets.

Back to TMUS’s price action yesterday. Given the sharp reversal higher, I would have thought options activity would have been a bit heavier, but volume was less than 2x average daily with call activity just a tad above that of puts. What makes that more unusual is the massive skew in total options open interest of 244,000 calls to only 44,000 puts:


But that open interest might be deceiving as nearly 200,000 of those options are now deep in the money and expire next Friday. I suspect they are hedged nearly one up, which should have limited impact on the stocks press as we get close to expiration:


It appears this call activity occurred back in May, on the 10th and the 11th when the stock was near $40, it looks like the Jan 50/55 call spread was bought in two blocks, 40,000 for on May 10th for 61 cents and 50,000 on May 11th for 54 cents:

Times and sales on the Jan 50 strike:

Times and sales on the Jan 55 strike:

So it appeared a trader build a defined risk out of the money bullish bet on TMUS, spending $2.44 million in premium on the first block and $2.7 million on the second for a combined $5.14 million for an average price of about 57 cents.  This call spread has the potential to worth $5 on Jan expiration, which means the trader can make up to $4.43 on 90,000 contracts, or close to $40 million if the stock is above $55, which it is with a week and half to Jan expiration.