Merger Mania: How to Play It Safe With TMUS Stock

by Joseph Hargett | June 4, 2014 9:57 am

Merger Mania: How to Play It Safe With TMUS Stock

No. 4 wireless carrier T-Mobile U.S. (TMUS[1]) leaped back into the headlines this week after parent company Deutsche Telekom AG (DTEGY[2]) said it is willing to retain a stake in its U.S. operations in the event of an acquisition deal with No. 3 U.S. carrier Sprint (S[3]).

The announcement clears a significant financial hurdle for Sprint parent Softbank (SFTBF[4]), and opens the way for savvy traders to position themselves in TMUS stock with more certainty ahead of a potential Sprint/T-Mobile tie-up.

That said, there are still plenty of risks to be had when considering a T-Mobile trade.

For instance, the size of Deutsche Telekom’s minority stake in TMUS has yet to be decided, Softbank has yet to lock up funding for the merger, and the relevant legal authorities have yet to weigh in on any potential deal. That last point really sticks in the craw of those investors who jumped in ahead of AT&T’s (T[5]) attempted buyout of T-Mobile.

So, while Softbank/Sprint Chairman Masayoshi Son is fighting really hard to make a Sprint/T-Mobile tie-up a reality, the deal is still far from done.

The question for T-Mobile shareholders is, “How do I trade TMUS stock and protect against an AT&T repeat?”

Options Trade on TMUS Stock

Assuming you are looking to buy TMUS stock in a bid to take advantage of the potential buyout or any buyout-related upside, you can use TMUS options to protect your investment entirely or simply limit losses.

060414 TMUS Stock 300x247 Merger Mania: How to Play It Safe With TMUS Stock
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Specifically, traders might want to consider a TMUS married put position.

By using this strategy, you would purchase one front-month at-the-money or out-of-the-money TMUS put for every 100 TMUS shares purchased. The strike of the purchased put should reflect your risk tolerance — i.e., an at-the-money June $34 put offers full protection, with losses limited to the cost of the put and brokerage fees, while an out-of-the-money June $32 put would allow for some slippage in TMUS stock to see the trade play out.

For example, let’s say that you want to buy 100 shares of TMUS (currently trading for roughly $34 per share). You could protect those shares by purchasing one June $32 put, which was last asked for 81 cents, or $81 per contract. In the end, the total cost for your option position would be $81, while the stock position would total $3,400 (excluding brokerage fees, of course).

In this trade, the put option acts as short-term insurance for the long stock position. If TMUS closes below $32 per share when June options expire, you would be able to exit the position while only suffering a roughly 6% loss on the stock position (assuming you bought at $34 per share) plus the cost to purchase the June $32 put.

If TMUS holds above $32 through June expiration, you can roll the June $32 put forward into July if you feel you still need the protection.

Finally, you could limit losses even further (to just the cost of the purchased put) by opting for the June $34 put, but this would leave very little room for the position to play out.

As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.

Endnotes:
  1. TMUS: http://studio-5.financialcontent.com/investplace/quote?Symbol=TMUS
  2. DTEGY: http://studio-5.financialcontent.com/investplace/quote?Symbol=DTEGY
  3. S: http://studio-5.financialcontent.com/investplace/quote?Symbol=S
  4. SFTBF: http://studio-5.financialcontent.com/investplace/quote?Symbol=SFTBF
  5. T: http://studio-5.financialcontent.com/investplace/quote?Symbol=T

Source URL: http://investorplace.com/2014/06/tmus-stock-married-put/
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