T-Mobile US Inc (NASDAQ:TMUS) is the new telco kid on the block. Its colorful logo matches the flashy nature of its CEO. TMUS stock is also lively and trades in wide ranges. Much to the chagrin of their competitors, it took the telecom price war to another level. T-Mobile management forced even Verizon Communications Inc. (NYSE:VZ) to finally capitulate and join the promo-palooza.
While as a consumer I appreciate its promotional efforts, it does worry me a bit about its margins. This race to lower prices cannot be sustainable, so something has got to eventually change. But this is not imminent, so for the mid-term I will continue trading the price action at hand.
How to Trade TMUS Stock
The whole sector has been volatile thanks to a slew of rumors and mergers and acquisition speculations. This uncertainty is unsettling to those who hold the equity, but it creates opportunities for options sellers.
TMUS fell 12% just this month and it technically now sits at a pivot level, which should lend some support. While the bottom may not be a hard line, all I really need is an area of support against where I can sell risk for income.
Fundamentally, T-Mobile is not cheap. In fact its price-earnings ratio is twice that of Verizon and AT&T Inc. (NYSE:T). So it could still have some froth to shed before this dip is over, especially if the equity markets in general continue sliding lower. So I will have to account for that possibility in my trades.
Technically, I can make the same argument. Even after this dip, TMUS stock is still 40% higher than a year ago. So I can hardly call this a tradable bottom. It’s more like a bet on the price-action opportunity. So far, relying on the bulls to buy the dips has been fruitful. That said, I will assume this continues for another few months.
I am a believer in price balance. In January, Wall Street rejected $56 per share as too low and TMUS stock spiked. Then we saw the other side of the pendulum as traders rejected the overshoot and $66 was too high. So somewhere in the middle lies the truth and here we are in it. Cooler heads usually prevail around levels of balance and this could create a temporary stalemate.
The Trade: Sell the TMUS Nov $52.50 put and collect $1.40 to open. This is a bullish trade which has an 80% chance of success. But if price falls below my strike I will have to own the shares then would accrue losses below $51.10.
I never sell naked puts unless I am willing and able to own the shares. Otherwise I can sell spreads where the maximum loss is finite, thereby mitigating the risk.
The Safer Bet: Sell the TMUS Nov $52.50/$50 bull put spread where I have the same odds of success, but with less risk. Yet I can still yield a 20% return. Compare that with buying the shares at face value here then hoping for price to rally 20% just to match the performance of the spread.
I could chase the upside and add a July debit call spread to capture a rally, but at near all-time high equity market I will delay such entry for now. Just remember, investing carries risk, otherwise it wouldn’t be potentially profitable, so I never risk more than I can afford to lose.
Learn how to generate income from options here. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @racernic and stocktwits at @racernic.
