As addicted as we’ve become to our smartphones, and thus as saturated as the market has become, I believe there’s enough room for all providers to prosper. There will be distinct winners, and the rest will be assimilated. Thus, the downside risk to Sprint Corp (NYSE:S) and other telecom stocks is limited. Today, in fact, I have a long play on Sprint stock to share.
Although T-Mobile US Inc (NASDAQ:TMUS) takes the trophy for highest-profile competitor because of its borderline trouble-maker CEO, Sprint stock is keeping stride with it in spite of questionable fundamentals. Luckily I’ve been profitably long those two, and also Verizon Communications Inc. (NYSE:VZ), using options.
So I practice what I preach already, and I plan on repeating performance today.
The Setup
Back in June, I profited when I sold put options in S. Today is merely a rinse-and-repeat setup that continues to work. This is especially easy in an uber-bullish equity market like this.
Click to Enlarge S stock had been struggling coming into these earnings. It was down 3% on Monday and down 15% since last time it reported. But it wasn’t all bad news, as shares still were up 30% over the past 12 months. Sure enough, this morning’s reaction of +10% confirms my thesis and adds resolve to my bet.
These days, Wall Street favors the two that are the least profitable; S and TMUS by far beat VZ, despite the latter’s better fundamentals. Investors just aren’t looking for value; this seemingly illogical behavior is probably due to the rumor mill of mergers and acquisitions.
But that’s fine. Today’s trade isn’t an argument for value.
The setup here is a pure bet on price action. I want to sell risk below levels that other investors fear and I think will hold. If price stays above those levels, then I keep the premium that I collect to open the trade as maximum gains.
How to Trade Sprint Stock
The bet: Sell the S Feb 2018 $7 naked put and collect 70 cents to open. Here my odds of success are close to a coin flip, but I don’t fear owning Sprint stock at $7. I am confident that in that case, I would be able to manage out of them fairly well. If price falls below $6.30, though, I will suffer.
Not all investors want to sell naked puts. For those, I’d sell put spreads instead and thereby limit the amount at risk.
The alternate bet: Sell the S $7/$6 credit put spread, where I have the same odds of success but I can still earn a 35% yield for my efforts.
Much like last time I did this trade back in June, I again need to acknowledge the technical danger of retesting $6.50 or lower. Last time my trade paid me well, so I come into this one with profits in hand, thereby giving me a bit of extra courage.
The alternate way to participate with Sprint stock is to chase it by paying face value for it and hoping for higher prices. Here, I only need it to stay above my strike.
Selling options is risky business, so never risk more than you’re willing 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.
